(Bloomberg) -- The two-year US Treasury yield climbed back toward last month's peak amid a selloff in global bond markets as rising oil prices rekindled worries about inflation.
That short-term yield, which closely tracks expectations for the Federal Reserve's monetary policy, rose as much as five basis points to 4.23%, within a basis point of its June 22 peak. That was the highest since February 2025. The 10-year yield climbed as much as four basis points to 4.59%, the highest since late May.
The jump reflects resurgent expectations that the Fed will need to start hiking interest rates to rein in rising consumer prices. Minutes of policymakers' June 16-17 meeting, released Wednesday afternoon in Washington, showed that a few committee members saw a case for a rate increase, though they ultimately supported the decision to make no change.
The central bank's Federal Open Market Committee pivoted toward raising interest rates this year at the June meeting, the first under Chairman Kevin Warsh's leadership. That drove the US two-year yield to its 2026 high over subsequent days, followed by a retreat as oil prices declined.
"Bond investors are wary," said Bryce Doty, a bond fund manager at Sit Investment Associates. "If oil prices are starting to go up and there's a hard message that they're going to do whatever it takes to have price stability, yields are going higher."
US interest-rate traders have resumed pricing in that the Fed will increase rates by October, compared with December previously. The potential for higher oil prices to keep inflation elevated has guided monetary policy expectations since US attacked Iran in late February, causing a supply shock.
While benchmark oil prices remain well off peak levels seen in late March, they have been climbing again as renewed conflict flares between the US and Iran and President Donald Trump casts doubt on the continuation of the ceasefire between the two.
The selloff boosted the yield for an auction of 10-year Treasuries. The $39 billion second reopening of the 10-year note that debuted in May was awarded at 4.580%, the highest for the tenor since February 2025. The result was about 0.6 basis points lower than indicated by pre-auction trading just before 1 p.m. New York time, the bidding deadline, a sign that demand slightly exceeded expectations.
The sale was the second of three longer-term Treasury debt auctions this week. Demand was strong for a sale of three-year notes on Tuesday. The cycle concludes Thursday with a $22 billion reopening of 30-year bonds.
Real Yields
The decline in the US Treasury market follows a deeper one earlier in the day in Europe, when yields jumped more sharply on stepped up bets about rate hikes by the European Central Bank and the Bank of England.
Yields for some Treasury inflation-protected securities — termed real yields because they represent the rate of return investors require when inflation risk is absent — reached the highest levels in more than a year. For 10-year TIPS, yields reached 2.30%, the highest since April 2025 and near the high end of the range since 2023.
Rising real yields are a sign of mounting investor confidence that the Fed can raise interest rates without derailing the economy.
Because real yields are lower than conventional yields, bigger increases narrow the gaps between TIPS and regular Treasury yields of the same tenor, which are a proxy for expected inflation rates. For 10-year securities, the breakeven inflation rate is around 2.26%, down from over 2.5% in May.
"The Fed's firm commitment to its price stability mandate has also arguably justified the relative pick up in real yields at the expense of breakevens as markets grow convinced that a hawkish central bank will deliver its goal," Dhiraj Narula, an interest-rate strategist at
--With assistance from Alice Atkins.
(Updates yields.)
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