(Bloomberg) -- Treasuries fell for a fourth day — lifting yields to the highest levels in several weeks — on concern that rising crude oil prices will stoke inflation.
Yields across maturities were higher by two to four basis points as the US benchmark crude oil futures contract topped $79 a barrel for the first time in a year. It's climbed from under $70 this week after the US attacked Iran on Feb. 28, leading traders to wager on a later start to any Federal Reserve interest-rate cuts this year.
While the selloff stalled amid declines in US equities and a flurry of buying in Treasury futures, it was backstopped by the US government's weekly tally of new jobless claims. The initial claims figure was slightly lower than economists estimated, a sign of labor-market strength and another challenge to wagers on Fed interest-rate cuts that benefit bonds.
"The market is not going to trade on economic data today," said John Brady, managing director at RJ O'Brien. "It remains about the widening war in the Middle East and the energy markets."
Meanwhile, the February US employment report to be released Friday is expected to show deceleration in job growth, potentially reviving the case for Fed rate cuts.
Yields on two-year notes, more closely tied than longer tenors to Fed rate changes, rose as much as five basis points toward 3.60%, the highest since Jan. 28. They're about 20 basis points higher on the week, the biggest increase since April. The 10-year yield was around 4.14%, the highest since Feb. 12.
Speaking Thursday, Richmond Fed President Tom Barkin said inflation risk stemming from fuel prices had policy implications, and that the trend in consumer prices "certainly puts pause to any conclusion that we're done fighting this."
Related story: Barkin Says Fed Response to War Depends on Length of Shock
Adding to upward pressure on Treasury yields, sales of new corporate bonds were set to be heavy again, with 18 borrowers in the arena, the most in two months. Wednesday's $17.7 billion haul by five issuers began to clear a backlog that developed over the previous two days as the onset on Middle East hostilities eroded risk appetite.
Many other government bond markets suffered steeper losses than Treasuries, particularly European markets, where most 10-year yields climbed by at least nine basis points.
Oil benchmarks extended their advance after reports China told its largest oil refiners to suspend exports of diesel and gasoline due to the escalating conflict in the Persian Gulf. Brent crude climbed toward $85 a barrel, extending this week's gain to more than 15%.
"Higher oil, especially for longer, is going to pressure nominal yields higher," said Kenneth Crompton, senior fixed-income strategist at National Australia Bank Ltd. "And Treasury yields, in our view, were too low to start with before hostilities began."
Traders have dialed back expectations for Fed interest-rate cuts as inflation expectations build. Swaps markets are currently pricing in about 35 basis points of rate cuts by year-end, compared with 60 basis points at the end of last week. At the time, a quarter-point cut was fully priced in by July. That shifted to September, and confidence in a move before October is slipping.
The Iran conflict has showed little sign of abating, with Tehran targeting Israel and Gulf states, and US and Israeli forces bombing targets in the Islamic Republic, including the sinking of an Iranian warship in international waters.
--With assistance from David Finnerty and Edward Bolingbroke.
(Adds Treasury futures block trades and US stock market declines and updates yield levels and oil prices.)
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