(Bloomberg) -- US Treasuries slumped for a second day as surging oil prices prompted traders to slash bets on more than one Federal Reserve interest-rate cut this year.
Short-maturity debt led the move, with the two-year yield jumping as much as 12 basis points to 3.59%, approaching its highest level this year. Traders priced in about 50% odds of more than one quarter-point rate cut by the Fed this year, after fully pricing in two cuts as recently as Friday.
Investors are dumping bonds globally on fears that the US-Israeli war on Iran will stoke inflation, altering the course of monetary policy. Wagers on a prolonged period of steady interest rates — or in the case of the Fed, further cuts — are being reassessed as the conflict has unleashed a surge in oil and natural gas prices.
The US 10-year yield rose seven basis points to 4.10%. Comparable UK, French and Italian yields all rose more than 10 basis points.
A rise in oil prices "is not a good sign for lower rates," said Tom di Galoma, managing director at Mischler Financial Group. "I think everyone needs to reevaluate their Fed cuts for 2026" to account for the possibility of a prolonged Middle East conflict.
While the Treasury selloff is milder because of the potential for US domestic energy production to act as a buffer, the European bond rout "is forcing US Treasury traders to re-examine their view that US yields will be lower this year," di Galoma said.
Treasuries in February had their best month in a year as inflation ebbed and US stocks stumbled, creating haven demand. At the same time, signs of resilience in the US job market squelched wagers on a Fed rate cut this month. Meanwhile, the Labor Department's February employment report is slated to be released Friday.
"From a Fed perspective, this gives them more of a reason to hold for longer to see the impact coming from the oil spike if we continue to see a labor market holding up," said Molly Brooks, US rates strategist at TD Securities.
Before this week, Treasures were benefiting from a flight-to-safety trade fueled in part by concerns over artificial intelligence and bets on more Fed rate cuts. That evaporated abruptly as Israel and the US launched strikes on Iran on Feb. 28, which has since broadened in the region.
--With assistance from Alice Gledhill and Alice Atkins.
(Adds comments and updates yield levels.)
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