US government bond yields climbed to new multi-year highs as oil prices continued their surge, leading traders to increase their bets on a Federal Reserve interest rate hike. Treasury yields rose by six to eight basis points across all maturities. The yield on the 30-year bond reached levels not seen since 2007, while the two-year note's yield surpassed 4.5% for the first time since 2024. Traders are now pricing in about a 70% chance of a Fed rate hike next week and fully expect a move by October, a shift from previous expectations of a December hike.
This broad sell-off in bonds is a global phenomenon, with rising energy prices impacting government bond markets worldwide. UK two-year yields increased by 17 basis points, and Eurozone bond markets declined after the European Central Bank (ECB) raised interest rates by a quarter point to 2.5%. The ECB's decision was based on expectations that inflation would remain significantly above target for an extended period. Benchmark oil prices have climbed more than 5% to their highest levels since May, approaching peaks reached after the US attacked Iran in late February.
The 10-year Treasury note's yield rose as much as nine basis points to 4.93%, a level last observed in November 2023, and is approaching the psychologically significant 5% mark. This upward pressure on yields is attributed to concerns that rising crude oil prices will fuel inflation, making it harder to contain. Tony Farren, managing director in rates sales and trading at Mischler Financial Group, noted that there is "no reprieve for yields to go lower if inflation remains elevated."
In related news, a US Treasury Department buyback operation, intended to control the rise in long-term Treasury yields, underperformed expectations. The department bought only $5.19 billion of 10- to 20-year debt, falling short of its announced maximum of $6 billion. This led to skepticism among some analysts, with George Catrambone, head of fixed income at DWS Americas, likening the effort to "bringing a squirt gun to a firefight," suggesting it was insufficient to counter investor demand for higher premiums on long-term debt amidst concerns about debt, deficits, and inflation.
