Treasuries pared their biggest rally of the year after the latest flareup in tensions in the Middle East dissipated, bringing the outlook for inflation back into focus.
The yield on 10-year US government bonds was trading just five basis points lower at 4.59% — almost fully erasing an earlier drop of 14 basis points. The moves come after Reuters reported a senior Iranian official said the nation has no plans to strike back at Israel immediately, fueling hopes the conflict would not escalate further.
It was the latest bout of volatility that has taken the edge of this year’s selloff. Still, the 10-year Treasury is set for a fourth straight week of losses as investors price in a much shallower path of monetary easing this year. The yield on the securities has climbed almost a full percentage point from a low in late 2023, hitting its highest level since November this week.
“The inflation discussion is far more important for Treasuries than the geopolitical discussion at the moment,” said Peter Kinsella, the global head of FX strategy at Union Bancaire Privee. “Everything suggests there is limited appetite on either side to really increase confrontation. So it’s mainly about inflation and central banks.”
Behind the repricing lies a string of strong economic data and hawkish remarks by Federal Reserve officials, including a signal from Chair Jerome Powell that the central bank is in no hurry to cut rates.
“Markets are confused on whether they should be going for safe havens or whether they should worry about higher US inflation and the Fed not cutting,” said Matt Cairns, head of credit strategy at Rabobank.
Money markets are betting on one quarter-point interest-rate cut from the Fed by November with a 50% chance of a second to follow a month later. Earlier this year, a cut in June was almost fully priced.
A gauge of the dollar was 0.2% higher, having climbed as much as 0.6% to its highest since November earlier. European and UK government bonds were slightly up, while Brent crude erased its advance after briefly spiking past $90 per barrel.
“I would say that we’ve seen a material rise in US yields over recent weeks, and a lot of investors and traders, including systematic accounts, will likely be running short US bond positions,” said Andrew Ticehurst, rates strategist for Nomura Holdings Inc. in Sydney. “So there is clear risk that some of these positions will be covered, which could lead to out-sized moves.”
This article was provided by Bloomberg News.