A selloff in Treasuries resumed on Monday, with yields on rate-sensitive US two-year bonds rising five basis points to 4.90% and the 10-year yield climbing four basis points to 5.20%. This occurred as Brent oil gained almost 2% to $106.31 a barrel after President Donald Trump rejected Iran's latest proposal to reopen the Strait of Hormuz, which exacerbated inflation concerns. Sovereign bonds also weakened in Japan, Australia, and South Korea, following multiyear highs in yields last week due to hawkish comments from Federal Reserve officials.
Market sentiment is heavily influenced by the ongoing hawkish Federal Reserve messaging and oil prices remaining above $100. Swap markets are currently pricing in three additional interest-rate hikes from the Fed next year, with a potential for a fourth. However, Treasury Secretary Scott Bessent has encouraged Fed policymakers to maintain an "open mind" regarding interest rates, suggesting that productivity gains from artificial intelligence and deregulation could help manage US inflation.
The bond market is nearing a point where a series of Fed rate increases could signal a risk of the US economy stalling. The extra yield investors demand for 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 curve suggests a potential for an inversion, where shorter maturities yield more than longer ones, a phenomenon often observed before economic slowdowns. The unfolding geopolitical situation surrounding the Strait of Hormuz is seen as a crucial factor for the bond market's future direction, with ongoing pressure on Iran to make concessions on its nuclear program to facilitate peace talks with the US.
Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities, noted that President Trump's rejection of Iran's diplomatic offer is driving renewed oil price increases and weighing on US Treasuries. This Middle East gridlock is expected to remain the market's primary focus until the release of PCE, ISM, and payrolls data later in the week. Other related market movements include Japan's 10-year yield advancing 2.5 basis points to 3.095% and Australia's 10-year yield advancing four basis points to 5.41%.
