(Bloomberg) -- A selloff in US Treasuries deepened on Monday as oil prices rose after President Donald Trump rejected Iran's latest proposal to reopen the Strait of Hormuz.
The declines pushed most US yields higher by 10 basis points in mid-morning trading, with 10- and 30-year benchmark yields near the highest since 2007 and 2004. The yields on short-dated maturities, more sensitive to the Federal Reserve's policy, also soared.
Bonds have been selling off around the world as rising energy prices affect inflation, leading traders to price in more interest-rate hikes from major central banks. In the US, surging business activity and concerns about government debt levels have provided additional momentum.
"The ongoing hawkish Fed messaging and oil above $100 are pivotal to the bearish impetus," said Damien McColough, head of fixed income research at Westpac Banking Corp.
Oil prices jumped on Monday as Iran said it wouldn't soften its conditions to reopen the Strait of Hormuz. Trump said he expects negotiations to resume this week despite rejecting Tehran's latest offer, Axios reported.
Rising energy prices are adding pressure on the Fed to hike rates to rein in inflation. Swap markets are fully pricing in three more interest-rate hikes, with the potential for a fourth.
Expectations of tighter monetary policy have driven a surge in short-end rates, reducing the extra yield investors demand to hold 10-year Treasuries over two-year notes to as little as 17 basis points last week, the slimmest gap since early 2025.
The so-called flattening of the curve increases the possibility that the 10-year will soon yield less than shorter maturities, a closely watched phenomenon known as a curve inversion. An inverted curve has preceded each of the last eight recessions going back to the 1960s, although its predictive power proved faulty earlier this decade.
Treasury Secretary Scott Bessent has urged Fed policymakers to keep an "open mind" on interest rates, arguing that productivity gains from artificial intelligence and deregulation will help keep US inflation in check.
The bond market's next moves will likely depend on the unfolding developments surrounding the Strait of Hormuz and a slew of US economic data. The Wall Street Journal reported that negotiators are pressing Iran to make concessions on its nuclear program to revive the peace talks and placate Trump on an issue he has made a top priority.
"President Trump knocking back Iran's offer for diplomacy is driving a renewed rise in oil prices and is weighing on USTs," said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities in Singapore. The Middle East gridlock "is likely to remain the market's focus until PCE, ISM and payrolls data later in the week."
--With assistance from Hooyeon Kim.
(Updates with latest US Treasury moves.)
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