(Bloomberg) -- Treasuries are heading for their biggest weekly loss since April 2025 as surging oil prices fuel inflation concerns, overshadowing a surprisingly weak US jobs report that might otherwise bolster the case for Federal Reserve interest-rate cuts.
The $31 trillion market extended its losses on Friday, pushing yields on 10-year notes up by three basis points — and extending the rise this week to 22 basis points, the biggest such increase since President Donald Trump announced sweeping tariffs on US trading partners nearly a year ago. Traders were pricing in at least one rate reduction this year, as soon as September.
"It follows, intuitively, that the Treasury market is struggling to rally further in light of the forward inflationary risks associated with the conflict in the Middle East," said Ian Lyngen, head of US rates at BMO Capital Markets.
Yields on 10- to 30-year Treasuries reached intraday highs on Friday as brent crude futures hit $90 a barrel for the first time in almost two years. Two-year yields, which are sensitive to changes in the Fed's policy, jumped 23 basis points this week to 3.6%.
Those moves set the tone as investors focused in on energy costs — and the potential repercussions they could have on global inflation and central bank policy — rather than the latest signs of fragility in the labor market.
While a government report showed US employers unexpectedly cut jobs in February and the unemployment rate rose, yields only declined momentarily as attention returned to conflict in the Middle East. Data also showed US retail sales declined in January, restrained by weakness at auto dealers as winter weather-related disruptions tempered some activity.
"The job market has been on the weaker side," said Gregory Faranello, head of US rates at Amerivet Securities. "This, now in conjunction with the energy shock with Iran, complicates Fed policy."
US policymakers, who cut interest rates three times last year in response to a softening labor market, paused in January, with several expressing the view that inflation remained too high to lower rates further in the short term.
Federal Reserve Governor Christopher Waller told Bloomberg Television Friday that he doesn't expect the Iran war to have a "sustained" impact on inflation. Waller dissented from the Fed's decision in January, saying he preferred a quarter-point reduction because of signs of continued softness in the labor market.
Interest-rate swaps showed traders, who had been rethinking their expectations for the Fed this week amid the widening war in the Middle East, are now betting that US policymakers will cut rates by a total of 36 basis points by the end of the year, with the next move seen in September. That compared with an expectations of a reduction of 60 basis points a week earlier.
The war has also dramatically shifted the picture for the bond market outlook in Europe, which is vulnerable to energy shocks. Money markets now see the European Central Bank raising borrowing costs in 2026, a turnaround from a week ago, when a cut was viewed as more likely than a hike. Swaps are fully pricing a quarter-point hike by December this year, and are assigning around a one in three chance to a second one by April 2027. That's sending German government bonds toward their worst week in three years.
Globally, investors and policymakers are left debating whether any inflationary impact from the rise in oil prices will be transitory, after the Fed misjudged how persistent inflation would be in the wake of the pandemic and Russia's invasion of Ukraine in 2022.
"The market is questioning if the overall backdrop for the economy was strong enough as it is dealing with the energy price stagflationary and uncertainty shock," Priya Misra, a portfolio manager at JPMorgan Asset Management. "I think these cuts will come back – maybe the Fed will stay on hold in March, but the market pricing of the terminal rate should decline from 3.25% to below 3%."
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