Bond yields rise as US, Iran resume attacks

NEW YORK - US Treasury yields rose on Monday after the US and Iran renewed military attacks against one another and on lingering effects from Federal Reserve Chair Kevin Warsh's comments last week that the market viewed as hawkish.

The yield on the benchmark US 10-year Treasury note rose 3.6 basis points to 4.758% after earlier touching 4.768%, the highest since January 15, 2025. For the month, the yield is up 1.5 basis points, on track for its second straight monthly advance and fifth in the last six.

US forces struck two Iranian launchers on Iran's Larak Island on Sunday, a US official said, the first known American strikes on Iran since late July. Iran responded by attacking US forces stationed in Jordan, according to a Fox News reporter on Sunday, citing a US source.

Persistently high crude prices since the war with Iran began have stoked inflation, most notably in US consumer fuel costs. That has driven yields higher, both because investors anticipate prices will remain higher, and that the US Fed will have to raise short-term interest rates to dampen price pressures.

Expectations for a rate hike of at least 25 basis points at the Fed's upcoming meeting stand at 66.1%, according to CME FedWatch, up from 57% in the prior session and the 41.4% a week ago.

US crude rose 2.7% to USD 85.61 a barrel and Brent climbed to USD 90.34 per barrel, up 2.5% on the day. Iranian President Masoud Pezeshkian said on Monday that the country is still seeking a negotiated solution to its conflict with the US, but US President Donald Trump promised further strikes.

"Crude being back up complicates the inflation picture, especially if that's sustained," said JoAnne Bianco, partner and senior investment strategist at BondBloxx Investment Management in Chicago.

"If today's move is any indication, investors may continue to have some doubts. There's still a lot of uncertainty about what Fed policy will actually be and what they'll do in September and beyond, so I think that's the reason why you probably could see just a higher risk premium needed."

BOND MARKET REACTS TO FED SIGNALS

Yields jumped on Friday after Warsh said the central bank would "have work to do" if policymakers were not confident inflation would return to its 2% target. That raised expectations for a September rate hike.

The yield on the 30-year bond gained 4.8 basis points to a session high of 5.256% after touching 5.267%, its highest level since August 21. The yield is down about 2 basis points for the month.

A flurry of data on the labor market is scheduled to be released this week, culminating with the government's payrolls report on Friday.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 40.8 basis points.

The two-year US Treasury yield, which typically moves in step with interest rate expectations for the Fed, edged up 0.2 basis point to 4.352%. For August, the yield is up about 6 basis points and on track for a sixth straight monthly climb.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.321% after closing at 2.32% on Friday.

The 10-year TIPS breakeven rate was last at 2.314%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Ros Russell and David Gaffen)