Treasuries experienced a renewed selloff on Monday as oil prices rallied after President Donald Trump rejected Iran's latest offer to reopen the Strait of Hormuz, escalating inflation concerns. Yields on rate-sensitive US two-year bonds rose five basis points to 4.90%, while the 10-year yield climbed four basis points to 5.20%. Sovereign bonds also saw declines in Japan, Australia, and South Korea. This selloff follows a week of multiyear highs in yields due to hawkish comments from Federal Reserve officials.
Brent oil gained almost 2%, reaching $106.31 a barrel in Hong Kong trading, as Iran maintained its stance on not softening conditions for reopening the Strait of Hormuz. This renewed pressure on the Federal Reserve to consider interest rate hikes to combat inflation. President Trump indicated that negotiations are expected to resume this week despite his rejection of Tehran's recent proposal.
Analysts attributed the market movements to a combination of factors. Damien McColough, head of fixed income research at Westpac Banking Corp., noted that "The ongoing hawkish Fed messaging and oil above $100 are pivotal to the bearish impetus." Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities, added that the Middle East gridlock is likely to remain the market's focus until key economic data, such as PCE, ISM, and payrolls, are released later in the week.
Cleveland Fed President Beth Hammack pointed to resilient economic growth and a strong labor market as reasons for potential further tightening, which is contributing to higher long-term Treasury yields. Conversely, Treasury Secretary Scott Bessent urged Fed policymakers to maintain an "open mind" on interest rates, suggesting that productivity gains from artificial intelligence and deregulation could help manage US inflation.
The extra yield investors demand for holding 10-year Treasuries over two-year notes narrowed to just 17 basis points last week, the smallest gap since early 2025. This flattening of the yield curve increases the likelihood of an inversion, a phenomenon where longer-term yields fall below shorter-term yields, often seen as a potential precursor to an economic slowdown.
