US Treasury Bonds Decline as Robust Jobs Data and Middle East Tensions Fuel Rate Hike Bets

US Treasury bonds fell, with investors increasing bets that the Federal Reserve will need to raise interest rates, as renewed Middle East tensions also stoked inflation worries.

During Asian trading hours on Monday, yields on US Treasuries across maturities rose by approximately 2 to 5 basis points, with the most significant moves in shorter-dated bonds like the 5-year and 2-year notes, which are more sensitive to shifts in expectations for Fed policy.

Investors are still assessing last Friday's strong US jobs report, which exceeded all forecasts and reinforced the market view that Federal Reserve Chair Kevin Warsh will need to hike rates during his tenure to curb inflation. Concurrently, a new round of Israeli strikes on Iran pushed oil prices higher and could intensify inflationary pressures in the world's largest economy.

Traders have now repriced expectations for a 25-basis-point Fed rate hike by December, with the probability of a second hike standing at about 16%. Just last Thursday, market bets indicated the Fed would not raise rates by a quarter point until at least March 2027.

"The resilience of the labor market makes it easier for the central bank to adopt more restrictive policies to control high inflation," said Abbas Keshvani, Head of Asia Macro Strategy at RBC Capital Markets in Singapore. "Naturally, the front-end is seeing the heaviest selling pressure."

Since hitting lows in March this year, yields on 2-year and 5-year US Treasuries have surged more than 80 basis points, currently reaching 4.19% and 4.31%, respectively. The benchmark 10-year Treasury yield has climbed over 60 basis points to 4.56%.

Economists at Goldman Sachs Group stated they no longer expect the Fed to cut rates this year due to a stronger-than-anticipated labor market. JPMorgan Chase forecasts the 10-year Treasury yield will rise to 4.70% by year-end.

Traders are also betting that this week's CPI data will show the largest increase in several years, which would further bolster the case for raising interest rates.

In a program interview, former President Donald Trump attempted to tamp down market expectations for rate hikes, stating the Fed has "no reason" to raise rates, that increasing the benchmark rate is "the wrong thing to do," and that "we should actually be lowering rates."