By Christine Idzelis and Nora Redmond
The 2-year Treasury yield was rising Monday after seeing its biggest weekly jump since April
Treasury yields were rising Monday after oil prices jumped to around $100 a barrel.
The global bond market’s decline deepened Monday, as investors became more anxious about inflation fueled by higher oil prices after the conflict in the Middle East escalated over the weekend.
Yields on government bonds were up Monday morning, sending prices of the securities further down. In the U.S., the yield on the 2-year Treasury note BX:TMUBMUSD02Y was up about 4 basis points at around 3.60%, after last week posting its biggest weekly jump since April.
The rise in the 2-year Treasury rate reflects investors’ “dampened expectations” for interest-rate cuts from the Federal Reserve in the coming months and quarters because of inflation worries, according to a note Monday from Ian Lyngen, head of U.S. rates strategy at BMO.
“The risk of another leg higher in oil prices will likely serve as an inhibition to adding significant” exposure to the front end of the Treasury market’s so-called yield curve “until there is a clearer sense of the outlook for the global supply of oil,” Lyngen said in the note. “Rising military aggression has raised concerns of a wider and more prolonged conflict in the Middle East – prompting investors to reconsider the probability of a worst-case oil and gas shock.”
The yield on the longer-term 10-year Treasury note BX:TMUBMUSD10Y was also higher Monday morning, edging up about 1 basis point to around 4.16%, according to FactSet data, at last check.
“Ultimately, we expect that March will provide an attractive dip-buying opportunity for Treasuries, and we’ve got our sights set on 4.25%” for 10-year Treasury yields as “as a level that we’d begin scaling into a long duration position,” Lyngen said.
Some investors have started to fear stagflation, a scenario in which inflation and the risk of recession simultaneously rise.
If oil prices climb toward $120 barrel and remain there, “the conversation shifts quickly from stagflation risk to recession contingency planning,” Stephen Innes, managing partner at SPI Asset Management, said in a note emailed Sunday evening.
Inflation is already above the Federal Reserve’s target rate of 2%, and with ongoing air strikes in the Middle East disrupting the global supply of oil, it is likely to climb.
West Texas Intermediate crude oil prices (CL.1) have surged to around $102 a barrel, after an escalation in the Iran conflict over the weekend made investors more nervous about the risk of a prolonged war in Middle East.
Iran’s late Supreme Leader Ayatollah Ali Khamenei was killed during the fighting that began more than a week ago, and his son Mojtaba Khamenei was named as his successor Sunday, according to a report from the Associated Press.
Investors were also weighing a report from the Financial Times that ministers from the Group of Seven would meet later on Monday to talk about the potential release of petroleum from reserves coordinated through the International Energy Agency.
The spike in oil prices in has added pressure to gas prices in the U.S., with the average price of a gallon of regular gas rising to $3.48, reaching up to $5.20 in California, according to AAA.
However, shocks were felt more strongly outside the U.S. “The threat of a sustained oil price shock reverberated across other global markets,” Jim Reid, global head of macroeconomic research and thematic strategy at Deutsche Bank, wrote in a note. “European bonds saw a historic sell-off across fixed income, as countries braced for the impact of higher oil prices on inflation.”
The yield on the U.K. 2-year bond BX:TMBMKGB-02Y rose as much as 31 basis points before trading around 3.95% on Monday. The U.K. 5-year yield BX:TMBMKGB-05Y was rising around 11 basis points to around 4.15% in Monday morning trading.
Reid noted that Germany’s 10-year yields BX:TMBMKDE-10Y “saw their biggest weekly jump since Germany’s debt brake reform was announced last year,” referring to the decision by the country to allow defense expenditures above a preset limit.
-Christine Idzelis -Nora Redmond
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03-09-26 1058ET
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