(Bloomberg) -- US Treasuries slumped, lifting yields to the highest levels this month, as mounting oil prices further eroded expectations for Federal Reserve interest-rate cuts.
Ahead of a Fed rate decision to be announced at 2 p.m. New York time — with no change anticipated — traders all but abandoned wagers on a rate cut this year and began to price in the possibility that the central bank's next move will be an increase during the first half of 2027.
Yields across maturities rose by four to six basis points, with short-dated tenors most sensitive to Fed rate changes leading the shift. The two-year note's yield climbed as much as six basis points to nearly 3.90%, last seen March 27. The 30-year bond's yield approached 5%, last seen in July. Yields also rose in European bond markets.
"The market is coming to grips with the possibility that oil prices could stay high for longer," said Priya Misra, portfolio manager at
The oil price surge unleashed by the US attack on Iran in late February has weighed on bonds globally. It has contributed to higher inflation by driving up the price of gasoline and led to an increase in inflation expectations. Under those conditions, central bank policymakers are seen as unlikely to deliver rate cuts that traders had fully priced in before the Iran war began.
Rates rose on short-term interest-rate derivatives that amount to wagers on what the Fed's target band for US overnight lending rates — which has been 3.5%-3.75% since December, resulting in an effective rate of 3.64% in recent weeks.
The December 2026 contract's rate climbed to about 3.62%, pricing in minimal chance of a cut, while those for contracts expiring during the first half of 2027 rose at least five basis points to levels exceeding the current effective rate, implying a chance of an increase.
Flows in those markets reflected new wagers on an increase in expectations that the Fed's next move could be a hike.
--With assistance from Edward Bolingbroke.
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