(Bloomberg) -- A three-day rally in the US Treasuries market came to a halt as a surge in oil prices sparked inflation concerns ahead of the release of eagerly anticipated economic data.
Yields on two-year securities, which are among the most sensitive to changes in monetary policy, increased four basis points while those on 10-year notes neared the 4% level. Gains this week had pushed 10-year rates as low as 3.95%.
Brent crude jumped as much as 6.2% — the most in four months — after the US announced sanctions on Russia's biggest oil producers in an effort to end the war in Ukraine.
Traders are shifting their focus to Friday's release of the consumer price index, the first real glimpse on the state of the economy since the start of the US government shutdown. The figure is forecast to have risen 0.4% in September on a monthly basis, according to a Bloomberg survey of economists. The core figure, which strips out more volatile components, is expected to increase 0.3%.
US breakevens — which measure inflation expectations — have picked up since reaching a four-month low on Monday, coinciding with the rally in oil. Inflation is expected to average 2.31% over the next 10 years, the highest in a week.
What Bloomberg Strategists say...
"The 4% area is a significant psychological benchmark for 10s. A move above there can signal investor concerns about inflation and economic strength, while a drop below it often indicates a flight-to-safety due to expectations of slower growth or potential Fed rate cuts. It's a logical placeholder ahead of Friday's CPI data."
—Alyce Andres, US Rates/FX Strategist, Markets Live
Still, money markets almost fully price the Federal Reserve to deliver two quarter-point cuts by year-end and three more by the end of 2026, according to swaps tied to policy-meeting dates. Investors expect the Fed to lower rates again next week to support a slowing jobs market.
"The balance of risks is now clearly tilted towards an excessive slowdown of the US labor market," Alberto Bernal, chief strategist at XP Investments in Miami, wrote in a note. "We continue to expect the FOMC to ease policy in the forthcoming two meetings."
(Updates yields.)
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