Driven by escalating Middle East tensions and soaring oil prices, U.S. Treasury bonds fell for the third consecutive trading day last Friday as the market reassessed inflation and Fed policy paths. According to Reuters, as the Iran conflict pushes up energy prices, global bond yields have generally risen, with U.S. bond yields reaching their highest levels in about eight months. The market's expectations for a rate cut this year have significantly cooled, with some interest rate contracts even starting to factor in the possibility of another rate hike.
The yield on the two-year U.S. Treasury rose to about 3.89%, and the 10-year yield rose to about 4.39%, reflecting investors' dual reassessment of short-term policy rates and medium- to long-term inflation prospects. At the same time, UK and German bonds were also sold off, indicating that the energy shock has rapidly transmitted from geopolitical risks to the global interest rate market.
Oil prices are the core variable in this bond market adjustment. Reports from Reuters and the Associated Press indicate that Brent crude closed last Friday above $112 per barrel, while U.S. crude was about $98.32, influenced by disruptions in the Hormuz Strait and the risk of attacks on Middle Eastern energy infrastructure. Oil prices have risen by more than 50% this month.
The rapid increase in inflation concerns is due to the fact that, although the latest U.S. CPI remains moderate, the energy shock could change its subsequent trajectory. Data from the U.S. Bureau of Labor Statistics shows that the CPI rose by 2.4% year-on-year in February, with the core CPI rising by 2.5% year-on-year, and energy prices only up by 0.5% year-on-year. This suggests that if high oil prices persist, there is a risk of inflation readings being pushed higher in the coming months.
The changes in the interest rate market are also becoming increasingly clear. According to Reuters, as the market abandons bets on synchronized easing by major central banks, investors have started to price in "fewer rate cuts, or even renewed rate hikes." For the United States, this repricing leans more towards the "supply shock-driven inflation" logic rather than overheating demand.
If Middle East risks persist and crude oil remains around $100 per barrel or even rises further, the U.S. Treasury market may continue to exhibit a bearish steepening characteristic in the short term, where long-term yields rise faster than short-term ones, reflecting investors' demands for higher inflation and term compensation. This assessment is a deduction based on current market pricing.
