A selloff in Treasuries resumed on Monday, with yields on rate-sensitive US two-year bonds rising five basis points to 4.90% and 10-year yields climbing four basis points to 5.20%. This followed President Donald Trump's rejection of Iran's latest offer to reopen the Strait of Hormuz, which reignited Middle East tensions and pushed oil prices higher, intensifying inflation concerns. Sovereign bonds also fell in Japan, Australia, and South Korea. This continued the trend from last week when yields surged to multi-year highs due to hawkish comments from Federal Reserve officials.
The rise in oil prices was significant, with Brent futures gaining 2.1% to $106.49 a barrel and US crude futures adding 1.5% to $93.84 a barrel. The global bond market is experiencing pressure as traders rebuild short-duration hedges ahead of key economic data releases, including PCE and the September payrolls report. Yields on 30-year Treasuries nudged up to 5.5185%, their highest since 2004, having climbed 27 basis points this month. Two-year yields have shot up 55 basis points this month in anticipation of further Fed hikes, with markets implying a 66% chance of a second consecutive hike in October.
Analysts attributed the bearish impetus to ongoing hawkish Fed messaging and oil prices above $100. The extra yield investors demand for 10-year Treasuries over two-year notes shrank to as little as 17 basis points last week, the slimmest gap since early 2025. This flattening of the curve suggests that the 10-year yield may soon fall below shorter-dated notes. Damien McColough, head of fixed income research at Westpac Banking Corp., noted that the combination of hawkish Fed rhetoric and high oil prices is pivotal to the bearish momentum. Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities, highlighted the Middle East gridlock as a key market focus until upcoming US economic data is released.
