A selloff in Treasuries resumed on Monday, driven by a rally in oil prices after President Donald Trump rejected Iran’s latest offer to reopen the Strait of Hormuz, which heightened inflation concerns. The yield on rate-sensitive US two-year bonds increased by five basis points to 4.90%, while the 10-year yield climbed four basis points to 5.20%. Sovereign bonds in Japan, Australia, and South Korea also declined. This recent selloff follows last week's surge in yields to multiyear highs due to hawkish comments from Federal Reserve officials.
Brent oil gained almost 2% to reach $106.31 a barrel as Iran maintained its conditions for reopening the Strait of Hormuz, which renewed pressure on the Federal Reserve to raise interest rates to curb inflation. President Trump indicated that negotiations are expected to resume this week despite his rejection of Tehran’s latest proposal. Damien McColough, head of fixed income research at Westpac Banking Corp., commented that "The ongoing hawkish Fed messaging and oil above $100 are pivotal to the bearish impetus."
Treasury Secretary Scott Bessent, however, urged Fed policymakers to maintain an "open mind" on interest rates, suggesting that productivity gains from artificial intelligence and deregulation could help keep US inflation in check. Despite this, swap markets are currently pricing in three more interest-rate hikes from the Fed next year, with the potential for a fourth. Cleveland Fed President Beth Hammack highlighted resilient economic growth and a strong labor market as factors contributing to higher long-term Treasury yields. Traders are fully pricing at least one more 25 basis-point hike before the end of the year.
The bond market is nearing a point where Federal Reserve rate increases could lead to a US economic slowdown. The extra yield investors demand for holding 10-year Treasuries over two-year notes narrowed to as little as 17 basis points last week, the smallest gap since early 2025. This flattening of the yield curve raises the possibility of an inversion, where shorter maturities yield more than longer ones. The unfolding situation in the Strait of Hormuz will be crucial for determining the bond market’s next movements, as negotiators are reportedly pressing Iran for nuclear program concessions to appease Trump and revive peace talks.
Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities in Singapore, stated that "President Trump knocking back Iran’s offer for diplomacy is driving a renewed rise in oil prices and is weighing on USTs." He added that the Middle East gridlock is likely to remain the market’s focus until key economic data, including PCE, ISM, and payrolls reports, are released later in the week.
