NEW YORK: US Treasury yields rise to multi-week highs on Wednesday after US President Donald Trump says he believes the memorandum of understanding with Iran is over, spurring a sharp rise in oil prices and a broad pullback in stocks and bonds.
The benchmark 10-year yield advanced to a seven-week peak of 4.597% earlier in the session, and was last up 3.8 basis points (bps) at 4.567%.
US 30-year bond yields also hit their highest in seven weeks, last trading up 2.4 bps at 5.067% .
Rising yields mean falling prices.
On the front end of the curve, the yield on two-year notes, the maturity most sensitive to market expectations for US Federal Reserve (Fed) interest rate moves, climbed to two-week highs of 4.235%.
It was last up 3.9 bps at 4.202%.
Treasury yields pared their increase, however, following a decent US 10-year note auction that saw primary dealers take down the lowest amount of supply since January, BMO Capital said.
That is a sign of a healthy appetite for the benchmark note.
Yields also retreated from their highs after minutes from the latest Fed meeting showed no urgency to hike rates.
Investors, however, were increasingly focused on developments in Iran, which overshadowed the day’s economic and market news.
Asked before a North Atlantic Treaty Organisation summit in Turkey whether last month’s memorandum of understanding to end the war was over, Trump said: “To me, I think it’s over. I don’t want to deal with them.”
The comments came after Iran’s Revolutionary Guards said they targeted US military sites in Bahrain and Kuwait on Wednesday after the United States launched a wave of strikes on Iran in response to attacks on tankers in the Strait of Hormuz.
The United States also revoked a license allowing Iran to sell oil.
“It’s a reversal of some of the risk-on that we have been seeing in equities, which has been triggered by what has been happening in the Middle East,” said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.
“There has just been a lot more doubt on whether or not the ceasefire is going to hold, and you see that with yields going up, coinciding with the jump in oil prices.”
Energy prices surged on Wednesday, with US crude futures up 4.6% at $73.65 per barrel.
Global stocks declined, with European shares dropping.
MSCI’s gauge of stocks across the globe fell 0.7%.
Oil prices have fallen sharply – from as high as US$126 a barrel in late April – since the United States and Iran reached a deal to end their war in mid-June, which started further talks on a range of issues, such as sanctions, and allowed energy to start flowing through the key Strait of Hormuz.
That left investors grappling with a familiar question: whether the latest tensions represented a meaningful shift in the outlook or merely another twist in a conflict many thought was winding down.
“It goes without saying that the tide change in the oil sector risks fully retracing back to the March/April peaks if the latest escalation leads to attacks on Iranian infrastructure and renewed uncertainty regarding stability in the region,” Ian Lyngen, head of US rates strategy at BMO Capital Markets, said in a research note.
Away from the geopolitical headlines, Wednesday’s trading also featured a strong auction of US 10-year notes, following an equally robust sale of three-year notes a day earlier.
The 10-year note for the auction was priced at 4.580%, lower than the expected rate at the bid deadline, suggesting that investors did not demand a premium to buy it.
Also in the spotlight were the Fed minutes, which showed that a broader debate seemed evenly divided, with “most participants” seeing scenarios in which inflation would fall towards the Fed’s 2% target on its own and “most” also seeing situations where it would remain high.
“Markets pricing a significant probability of a hike in July and close to a full hike by September appear excessively hawkish relative to the Fed’s reaction function,” Andrew Hollenhorst, Citi chief US economist, wrote in a research note.
US rate futures on Wednesday priced in a 30.5% chance of a rate increase at this month’s meeting, up from 26.7% on Tuesday.
For September’s meeting, rate-hike odds were up to 68% from Tuesday’s 62%, according to the CME’s FedWatch. — Reuters
