Treasury Selloff From Israel-Iran Tensions Is Likely to Linger

(Bloomberg) — US Treasuries fell as an earlier surge in oil prices fanned concern about inflation, with tensions between Israel and Iran escalating over the weekend.

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The yield on 10-year US bonds rose three basis points to 4.43% on Monday, underperforming German peers. Traders pared bets on interest-rate cuts from the Federal Reserve, pricing 46 basis points by the end of the year, compared to 49 basis points on Friday.

US Treasuries are down since tensions between Israel and Iran turned into a direct conflict on Friday and selling pressure is likely to have a lasting effect if past episodes of clashes are any guide. Iran’s direct strikes in April 2024 and another flare-up between the two nations in October had also pushed up US yields rapidly and kept them elevated over a 30-day period, Bloomberg analysis showed.

“The market is quite volatile, with investors gravitating toward safe-haven assets and driving up crude prices,” said Carlos Casanova, senior Asia economist at Union Bancaire Privee in Hong Kong. This is likely to result in an increase in 10-year US yields.

Oil prices initially spiked on the back of weekend attacks between Israel and Iran, but the moves eased throughout the session. Still, concerns that persistently higher energy prices could stoke inflation kept bonds in the US and Europe under pressure.

“Near term, risk aversion would prevent any significant selloff in rates while the rise in oil prices and expected inflationary pressures would limit any significant rally,” Mohit Kumar, chief European strategist at Jefferies International wrote in a note. He sticks to his underweight position in US Treasuries versus German bunds.

The developments add to risks for Treasury investors who are already confronting worsening inflation worries from President Donald Trump’s trade war and spiraling debt concern in the US. Traders demanding a higher premium for the risk of lending to governments are likely to propel yields higher with tensions in the Middle East impacting energy prices.

US yields have risen across the board, but the increases have been smaller in shorter tenors, which has steepened the curve. Two-year yields in the US rose two basis points to 3.96% on Monday.

Investors are also looking ahead to an auction of 20-year Treasuries later on the day. Last week, a closely watched sale of 30-year debt saw stronger-than-expected demand, easing worries that investors would shun the US government’s longest maturity.