A pullback in international oil prices from recent highs has spurred a rebound in U.S. Treasury prices. The decline in oil costs has eased concerns that energy-driven inflation could persist, though prices remain elevated overall, fueling investor worries that high energy expenses may hinder economic growth. The bond market rally pushed yields on U.S. Treasuries of various maturities down by approximately 3 to 5 basis points, largely erasing most of the gains seen last Friday. At that time, U.S. benchmark crude futures settled near $100 per barrel, reaching their highest level since mid-2022. During Monday's Asian trading session, oil prices briefly surpassed that level before retreating to around $95 per barrel.
Although rising energy prices could restrain economic expansion, their direct inflationary impact continues to be felt. U.S. retail gasoline prices have climbed from under $3 per gallon before the U.S. strike on Iran on February 28 to approximately $3.70 per gallon currently. Higher oil prices have tempered market expectations for Federal Reserve interest rate cuts, which typically benefit Treasury securities, thereby reducing the appeal of government bonds to some extent.
Gennadiy Goldberg, U.S. rates strategist at TD Securities, noted, "With oil prices holding at elevated levels and risk assets beginning to recover, the U.S. Treasury market appears to be showing early signs of stabilization. Last week's adjustment in rate-cut expectations was quite sharp, and the stabilization in oil prices at the start of this week may prompt investors to partially reverse some of the excessive repricing."
Movements in the U.S. Treasury market mirrored those in European bond markets. On Monday, the yield on the UK 10-year government bond fell to 4.74%, while yields on most eurozone sovereign bonds also declined. Meanwhile, Federal Reserve officials are set to hold a policy meeting this week, their first since pausing rate cuts in January. It is widely anticipated that the Fed will maintain the federal funds rate target range at 3.5% to 3.75%.
Traders still expect the Fed to cut rates by 25 basis points by the end of the year, but prior to the recent surge in oil prices, the consensus had been for two rate reductions in 2024. Influenced by the spike in oil prices, several Wall Street firms—including Barclays, Goldman Sachs, and TD Securities—which had previously projected a rate cut in June, pushed back their expectations to September last week.
Last week, U.S. Treasury yields rose to their highest levels since at least early February, with short-term yields—which are most sensitive to interest rate policy—registering particularly sharp increases. The two-year Treasury yield briefly surpassed 3.75%, marking the first time it had done so since August of last year. Since rising yields correspond to falling bond prices, a key U.S. Treasury return index indicates that all gains in the bond market for the year have been completely erased. The decline in prices of bonds issued earlier when yields were lower has largely wiped out returns accumulated since the end of last year.
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