(Bloomberg) -- US Treasuries fell, pushing 10- and 30-year yields to the highest levels in about two months, as a surge in crude oil prices stoked concern that inflationary pressures will prompt the Federal Reserve to raise interest rates.
Yields on Tuesday were higher by roughly two to four basis points across maturities, with the 10-year yield rising to touch its highest since late May at 4.64%. As the US and Iran exchanged strikes for a 10th consecutive day, the dollar advanced against most major currencies.
"Today's move is largely just a function of the continued rise in energy prices," said Izaac Brook, a rates strategist at RBC Capital Markets. "The rates move has been exacerbated by the break back above highly-watched technical levels" — of 4.20% in two-year yields and 4.60% in the 10-year's — "and typical summer trading conditions."
Interest-rate futures showed traders see about a 20% chance that the Fed will raise interest rates at the July policy meeting. While that's a pullback from the coin-toss probability seen earlier in the month, it signals that a hike is still seen as on the table for Warsh and his colleagues.
The bond market's recent selloff has wiped out a rally that followed the softer-than-expected inflation report released earlier this month. Brent crude, the global benchmark, has risen to roughly $92 a barrel as mediators work toward reviving a truce between the US and Iran.
"As we have seen, energy prices have been volatile and realized data — not just projected headline CPI moves — should dominate the Fed's decision making calculus," said Christopher Hodge, chief US economist at Natixis. "That said, the reaction function of the Fed under its new leader is far from certain."
In long-term bonds, some of the declines have been driven by elevated so-called real yields, which strips out the inflation component. Yields on 30-year Treasury Inflation Protected Securities earlier reached 2.95%, a level last seen in 2008.
Some of the market's move has also been exacerbated by lower-than-normal trading volumes. Monday's futures and options volumes for Secured Overnight Financing Rate contracts were 74% and 54% of 20-day average levels respectively, according to CME Group open-interest data.
(Updates with prices throughout, comments in sixth paragraph.)
More stories like this are available on bloomberg.com
