U.S. Treasury and European government bond yields fell in midday European trade as oil prices turned lower.
Still, Treasury yields remained close to multiyear highs as the stalemate between the U.S. and Iran surrounding the terms of reopening the Strait of Hormuz continued, even as a growing number of tankers are crossing the waterway.
Front-month Brent for November was last down 1% at $104.25 a barrel, having traded higher in early European trade.
The 10-year Treasury yield fell 2 basis points to 5.220%, hovering close to Monday's peak of 5.274%--the highest level since June 2007, according to Tradeweb. The 30-year Treasury yield edged down 1.8 basis points to 5.543%, staying below Monday's peak of 5.583%--a level last seen in 2002. The 10-year German Bund yield fell 4.5 basis points to 3.601%.
With yields at such high levels, some market participants consider that the bond selloff has potentially gone too far.
Ten- and 30-year U.S. Treasury yields around multi-decade highs "could attract investors as fixed income becomes increasingly competitive with equities as a source of capital for the insatiable appetite of AI demand," said Richard Hunter, head of markets at Interactive Investor.
J.P. Morgan strategists described 30-year Treasurys as "oversold," though they are wary that the trend for higher yields could continue.
"We are now left waiting for renewed evidence that would suggest the market is starting to respond to those conditions after we were stopped out of our long trade last week," they said in a note.
Notwithstanding the current breather, yields remain very high.
Strong economic data, a resilient labor market, robust AI expenditure, easier fiscal policy, and persistent energy inflation are forcing markets to reconsider the level at which rates could find an equilibrium, said Mauro Valle, head of fixed income at Generali Asset Management, in a note.
"If the U.S. and Iran start to negotiate again, the 5% level could be a neutral one for the next few weeks," he said.
Yields remain under upward pressure from energy prices "as the U.S. and Iran appear to be stuck in their negotiations," Antti Ilvonen, senior fixed income and FX analyst at Danske Bank, said in a note.
High oil prices are fueling market expectations of further interest-rate hikes by the Federal Reserve following the one earlier in September. Money markets currently price in 100 basis points of Fed rate hikes over a 12-month horizon, according to LSEG.
Analysts said high yields also reflect the strength of the U.S. economy.
"The surge in the 10-year Treasury yield to approximately 5.25% reflects higher oil prices and a strong U.S. economy more than AI debt issuance or fiscal concerns," said James Reilly, senior markets economist at Capital Economics.
Eurozone bond yields cannot take much comfort either from flash estimate data showing Spanish annual inflation at a three-and-a-half-year high of 5.0% in September, up from 4.6% in August.
Investors will likely assess U.S. data this week for clues on the trajectory of interest rates.
A slew of labor market data are due including the Job Openings and Turnover Survey at 1400 GMT, the ADP private payrolls report Wednesday, weekly jobless claims figures Thursday and the key nonfarm payrolls report Friday. The PCE prices data, the Fed's preferred inflation measure, are also due Wednesday.
On Tuesday, Fed governors Michael Barr, Christopher Waller and Michelle Bowman, as well as New York Fed President John Williams, are all slated to speak and could offer their views on the prospect of further rate increases.
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