US Treasury yields climb as energy costs keep inflation fears alive

Why Treasury yields are rising

US Treasury bond prices fell at the end of the week as persistent energy costs stoked fears that inflation will remain sticky, keeping expectations of further Federal Reserve interest-rate hikes firmly on the table.

The slide on Friday pushed yields back towards their recent multi-year peaks, reversing a temporary relief rally triggered by strong government debt auctions earlier in the week. The yield on the policy-sensitive two-year Treasury rose four basis points to 4.79%, while the 10-year yield ticked up to 5.25%.

Long-term government debt has suffered a weeks-long selloff. Investors are increasingly anxious about rising inflation linked to the conflict in Iran, alongside growing concerns about the ballooning US budget deficit. Earlier in the week, these pressures pushed 30-year Treasury yields to heights not seen since 2002.

"The market is digesting a very volatile week," said Brij Khurana, a portfolio manager at Wellington Management. Khurana noted that with yields holding just below their recent highs, bond prices are trying to find a stable footing before making their next major move.

Geopolitics and oil prices

Some of the immediate pressure on energy markets eased slightly, with Brent crude fluctuating around $104 a barrel. This followed a statement from US President Donald Trump, who promised to delay any further military action against Iran until after the upcoming midterm elections. Trump also stated that Russian President Vladimir Putin had agreed to release diesel supplies into the global market.

But market analysts warn against assuming the bond selloff is over. Padhraic Garvey, head of research for the Americas at ING Groep NV, suggested that investors remain highly defensive. "This marketplace is looking for an excuse to sell as opposed to buy," Garvey said, adding that there is still not enough evidence to justify aggressive buying of government bonds.

What happens next

The next major test for the market comes on Wednesday with the release of the latest US consumer price index (CPI) report. The Federal Reserve raised interest rates last month for the first time since 2023. While traders currently see only a 20 per cent chance of another rate hike in October, a December increase is now fully priced in.

"My concern is next week," said Marc Chandler, chief market strategist at Bannockburn. He warned that a strong inflation reading would likely force investors to price in a more aggressive Fed policy, which would drag bond prices down and push long-term yields even higher.

Investors will have a brief window to digest the next steps, with US cash bond markets closed on Monday for a public holiday.