Treasury Yields Move Higher as Oil Prices Fuel Inflation Concerns

The yield on the US 10-year Treasury note rose to 4.7% on Monday, its highest level so far this month, as rising oil prices added to concerns about inflation. The increase in crude prices came amid growing uncertainty over a deal between the US and Iran to end the war and reopen the Strait of Hormuz, with an agreement appearing increasingly unlikely in the near term. Higher oil prices have raised concerns that renewed inflationary pressures could force the Fed to keep interest rates higher for longer, despite recent signs of a slowdown in the labor market following Friday’s weaker-than-expected jobs report. Meanwhile, traders are awaiting this week’s US CPI and PPI reports for further clues on inflationary pressures. The odds of a Fed rate hike in September currently stand at around 46%, down from approximately 64% a week ago, while the probability of rates remaining unchanged is seen at about 54%.

The yield on the US 10-year Treasury note held around 4.66% on Monday but remained subdued after weaker-than-expected US employment data lowered expectations for a near-term Federal Reserve interest rate hike. Nonfarm payrolls unexpectedly declined by 23,000 in July, while sizeable downward revisions to the previous two months reinforced signs of a weakening labor market. Markets now price around a 44% chance of a 25 basis point rate hike in September, down from 67% a week earlier. Investors are turning their attention to key inflation data due this week for further clues on the monetary policy outlook. Meanwhile, markets continued to track developments in the Middle East as Iran denied holding direct talks with the US, despite Washington’s claims that a deal was close. Tehran also maintained its demands for an end to the US naval blockade, the lifting of sanctions and compensation for war-related damage before any agreement.

The yield on the US 10-year Treasury note fell sharply by 7 basis points to 4.6% on Friday after a weaker-than-expected jobs report scaled back bets on Fed rate hikes. Nonfarm payrolls unexpectedly declined by 23,000 last month, while figures for May and June were also revised sharply lower by a combined 103,000. Meanwhile, the unemployment rate fell to 4.1% from 4.2%, suggesting the labor market is facing renewed challenges after showing surprising strength earlier this year. The odds of a Fed rate hike in September fell to 42%, from 58% yesterday, while expectations for rate increases by December declined to 28 basis points from 32 basis points earlier. On Thursday, a Financial Times report said Fed Chair Warsh is set to stick with the central bank’s lean messaging despite the market backlash. Still, he would be prepared to raise rates in September if inflation readings released in the coming weeks come in hot, the FT reported.