U.S. Treasury bond yields leapt higher Tuesday, stoking renewed bets on a Federal Reserve rate hike and holding down gains for equity markets, as tensions in the Gulf added upward pressure to oil and energy prices around the world.
President Donald Trump fired off an angry missive on Truth Social late Monday, insisting that reparations from Iran will be put "firmly into any, and all, future negotiations" between the two nations following a demand from Tehran for compensation from the U.S. to end the months-long war in the Gulf region.
"I am likewise demanding compensation from Iran, for all of the people that they have killed and gravely wounded with their roadside bombs and many conflicts," the president said. "Additionally, compensation should be paid to the families of the hundreds of thousands of innocent protesters that Iran has killed over the last 50 years."
Strikes by Iran-backed Houthi Rebels in the Red Sea, meanwhile, added to concerns for a protracted conflict in the world's biggest oil producing region, taking Brent crude prices, the global benchmark, north of the $90 a barrel mark for the first time since late July.
The recent collapse of peace talks, alongside a seemingly intractable effort to open the Strait of Hormuz to normal flows of oil and energy, also added upward pressure to oil futures prices, with Brent now trading higher than $80 a barrel well into the January delivery dates.
That's added new and worrying inflation concerns to a bond market that already is grappling with higher yields, deeper government borrowing, rising deficits, and inflation worries tied to the broader Gulf conflict.
"Oil prices have resumed their rally, throwing a spanner in the market exuberance seen late last week and particularly after the soft U.S. jobs report," said Achilleas Georgolopoulos, a senior market analyst at Trading Point XM.
" U.S. equity indexes have quickly lost their bullish momentum, as a persistent rise in oil prices and bond yields is bound to support Fed rate hike expectations and/or fuel concerns about an economic slowdown," he added.
Benchmark 10-year Treasury notes yields touched 4.73% early Tuesday, nearing the highest levels in 18 months and adding more than 10 basis points over the past week. The paper, in fact, has risen more than 75 basis points since the war began in late February.
Longer-dated 30-year bonds, meanwhile, were changing hands at 5.275%, marking levels last seen prior to the global financial crisis in 2007.
The CME Group's FedWatch tool, in turn, is pegging the odds of a September Fed rate hike at around 52%, well up on the low 40% range seen after the softer-than-expected jobs report for July.
The moves come just a day ahead of key U.S. inflation data for July from the Bureau of Labor Statistics, which is expected to show a modest pullback in headline readings but a notable tick higher in monthly price pressures tied to the war with Iran.
Analysts expect a monthly reading of 0.1%, starkly higher than last month's 0.4% decline, with a year-on-year inflation tally of 3.4%.
ING's global head of markets, Chris Turner, thinks investors could live with a faster inflation reading, even if it points to a Fed rate hike next month, but remain alert to what's happening in fixed income trading.
"The one wrinkle on the horizon is the bond market," he said. "Longer-dated U.S. Treasury yields are at the top of recent ranges and the tech industry is planning a lot more issuance.
"A selloff in the bond market probably remains one of the key threats to a benign environment over the coming months," he added.
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