(Bloomberg) -- Treasuries dropped after President Donald Trump's threatening tone toward Iran in a prime-time address pushed up oil prices and added to concern over inflation.
US two-year yields climbed as much as six basis points to 3.86%, while those on the 10-year rose as high as 4.38% before trimming the moves. The dollar strengthened against all its Group-of-10 peers.
Hopes for a quick end to the Middle East conflict were dashed after Trump said the US plans to launch fresh attacks on Iran within the next two to three weeks and that the war is "very close to completion. West Texas Intermediate topped $110 a barrel, reviving jitters that the energy-price shock will make the Federal Reserve hesitant to cut interest rates this year.
"Markets seemed to be positioning for a ceasefire announcement last night, while President Trump's address gave the opposite," said Molly Brooks, rates strategist at TD Securities. "Markets continue to be focused on the inflation impact from the closed Strait of Hormuz."
Before the conflict broke out in late February, overnight index swaps had priced in more than two Fed cuts this year. Those expectations have been erased after the oil-price surge, with the market now expecting the Fed to stay on hold in 2026.
US economic data on Wednesday indicated the Iran war is putting upward pressure on inflation. The Institute for Supply Management's gauge of prices paid for manufacturing inputs climbed to 78.3 in March, remaining at the highest since mid-2022.
Concerns that inflation pressures will intensify drove the biggest monthly increase in 10-year Treasury yields in March since late 2024. While higher oil prices risk stoking inflation, they also threaten to weigh on global growth, complicating the outlook for monetary policy.
TD's Brooks said investors are likely to once again shift their focus toward the risk of a potential demand hit coming from higher oil prices. Money managers at Pacific Investment Management Co. and
"The arm wrestle between inflation expectations and growth concerns will continue," said Martin Whetton, head of financial markets strategy at Westpac Banking Corp.
Federal Reserve Chair Jerome Powell said earlier this week that longer-term inflation expectations appear to be in check, though officials are closely monitoring developments as they assess the economic impact of the war.
Global bond markets led Treasuries lower. Australian and New Zealand 10-year yields rose more than 10 basis points, while rates in Europe also climbed. Traders upped bets on European Central Bank interest-rate hikes to price three quarter-point increases this year.
"Even if there's a ceasefire, it's likely to be a fragile ceasefire," said Andrew Chorlton, CIO for fixed income at M&G Investments, adding that markets may be underestimating the inflationary consequences of a conflict that's likely to continue to flare up. "The risk premium should rightly be higher."
--With assistance from Ruth Carson and Matthew Burgess.
(Updates prices throughout, adds comments.)
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