US yields rise as Fed keeps rates steady, emphasizes resilient growth

NEW YORK – US Treasury yields advanced on Wednesday after the Federal Reserve kept interest rates unchanged, as widely expected, while maintaining its forecast for a single rate reduction in 2026.

The Fed also upgraded growth projections for this year and next, with Chair Jerome Powell noting in comments after the Fed decision that the US economy has remained resilient through a number of challenges. He added that generative artificial intelligence tools were certain to contribute to productivity gains for years to come.

Officials discussed the chance “our next move might be an increase” but “the vast majority of participants don’t see that as their base case,” Powell said at a press conference. But he added: “We don’t take things off the table.”

US two-year yields, which reflect interest rate expectations, were last up 9.1 basis points (bps) at 3.762%.

The benchmark 10-year yield rose 5.9 bps to 4.261%.

US 30-year yields were up 2.6 bps at 4.878%.

“Implications of developments in the Middle East for the US economy are uncertain,” the Fed said in a policy statement that also noted ongoing stable unemployment. It kept the policy rate in the 3.50%-3.75% range.

The US-Israeli war on Iran is in its third week and the Strait of Hormuz, through which about 20% of global oil and liquefied natural gas flows, remains largely closed off.

New projections from US central bank policymakers showed that the Fed’s benchmark overnight interest rate would fall by just a quarter of a percentage point by the end of this year, with no hint of the timing of such a move. That view was unchanged from previous projections.

“The big takeaway is that the uncertainty is still so high in terms of what’s going to happen with the war, what’s going to happen with the job market, what’s going to happen on inflation that it’s really hard to get a strong view about where the Fed is heading,” said Tony Rodriguez, head of fixed income strategy at Nuveen.

The new rate and economic forecasts showed the Fed, for the time being, largely looked through the oil shock, with policymakers still expecting to cut rates this year and anticipating inflation to be 2.2% by the end of 2027, near the central bank’s 2% target.

GROWTH AND INFLATION PROJECTIONS

Economic growth was raised slightly to 2.4% for 2026 versus 2.3% in December, and the projected unemployment rate was unchanged at 4.4%.

Inflation, as measured by the personal consumption expenditures price index, is now seen at 2.7% by year-end, based on the median policymaker view. In December it had been pegged at 2.4%.

Core PCE inflation, which strips out volatile oil and food prices, is now also seen rising to 2.7%, compared with 2.5% previously.

“The growth numbers are the more kind of surprising element increasing in 2026 by one-tenth and 2027 by three tenths,” Rodriguez said.

“So that to me implies that you get energy prices kind of almost resetting, maybe not back to below USD 60 per barrel, but certainly back to USD 65, a level that really wouldn’t impact growth very much and inflation will pass through relatively quickly.”

Post-Fed, US rate futures pared back easing bets for 2026, now showing just 20 bps of rate cuts this year, versus 26 bps late on Tuesday, according to LSEG data. The next rate cut is not likely until December or January next year.

Following the Fed statement, the yield curve steepened a touch, with the spread between two-year and 10-year yields at 51.4 bps. It was at 50.8 bps just before.

Earlier in the session, the curve narrowed to 48.8 bps from 52 bps late on Tuesday. Wednesday’s curve was the flattest since late November.

The curve showed a bear-flattening pattern, with short-term interest rates rising faster than long-dated ones. This scenario likely reflects expectations that the Fed could continue the pause of its rate-cutting cycle as it looks to tamp down rising inflation.

Earlier in the session, data showed stronger-than-expected producer price data for the month of February, which kicked off the rise in Treasury yields.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Chizu Nomiyama, Nia Williams, and Edmund Klamann)

Oil prices drop as US crude inventories show an increase

BEIJING – Oil prices fell slightly on Wednesday morning after sources citing American Petroleum Institute figures showed an increase in US crude inventories.

Brent futures dropped USD 1.15, or 1.11%, to USD 102.27 a barrel by 0108 GMT, while US West Texas Intermediate crude dropped USD 1.54, or 1.6%, to USD 94.67.

US crude stocks rose by 6.56 million barrels in the week ended March 13, market sources said, citing API figures on Tuesday.

A Reuters poll showed that US crude oil stockpiles were expected to have risen by about 380,000 barrels in the week to March 13.

In terms of supply, Iraq’s oil minister said on Tuesday that the Iraqi government and the Kurdistan Regional Government reached an agreement to resume oil exports to Turkey’s Ceyhan energy hub starting on Wednesday.

Oil flow from Ceyhan port is expected to start at 10 a.m. local time (0700 GMT) on Wednesday.

Libya’s National Oil Corporation said early on Wednesday that flows from the Sharara oilfield were gradually redirected through alternative pipelines after a fire broke out, adding that production remains on tap and there were no casualties.

Iran’s security chief Ali Larijani was killed by Israel, Tehran confirmed on Tuesday, the most senior figure targeted since the US-Israeli war’s first day, while a senior Iranian official said Iran’s new supreme leader rejected de-escalation offers conveyed by intermediary countries.

The United States military said Tuesday it had targeted sites along Iran’s coastline near the Strait of Hormuz because Iranian anti-ship missiles posed a risk to international shipping there.

Iranian power broker Larijani’s death and the US military’s strikes on Iranian coastal positions near the Strait of Hormuz have raised hopes that the conflict could end sooner, said Mingyu Gao, chief researcher for energy and chemicals at China Futures.

(Reporting by Sam Li and Lewis Jackson; Editing by Stephen Coates)

Dollar holds losses as risk appetite flickers ahead of central bank meetings

TOKYO – The dollar held losses on Wednesday as a glimmer of risk appetite came back to markets ahead of a slate of key central bank decisions.

The yen rallied from levels that conjured concerns of intervention in markets by Tokyo ahead of Japanese Prime Minister Sanae Takaichi’s meeting in Washington with President Donald Trump. The euro was stable after two days of gains ahead of the European Central Bank’s meeting later in the day.

The greenback has gained as the only remaining haven currency during the Middle East crisis that is now in its third week. Overnight, Tehran confirmed Iran’s security chief Ali Larijani was killed by Israel, the most senior figure targeted since the US-Israeli war’s first day.

“Volatility has settled largely due to relatively benign price action in energy markets overnight. But the risks haven’t diminished at all,” said Kyle Rodda, a senior analyst at capital.com. “If anything, it could cause a rapid risk-on move in the markets, it’s the US seemingly wresting control of the Strait from the Iranians.”

The dollar index, which measures the greenback against a basket of currencies, traded at 99.56 after a two-day decline. The euro was little changed at USD 1.1538.

The yen strengthened 0.06% to 158.91 per dollar. Sterling held steady to USD 1.3353.

The dollar reached a 10-month high at the end of last week as the Middle East conflict and rising oil prices prompted investors to seek safety in US assets.

In a sign of how the crisis is upending diplomacy and trade, Trump on Tuesday said he was postponing a highly anticipated trip to Beijing to meet with Chinese President Xi Jinping. Trump had been set to travel to Beijing from March 31 to April 2 for the first trip there of his 14-month-old second term.

Japanese PM Takaichi is due to depart for her meeting with Trump on Wednesday evening.

The US Federal Reserve will announce its policy decision on Wednesday, with the ECB, the Bank of England, and the Bank of Japan following a day later. They are all expected to keep rates unchanged, although traders will be looking out for commentary about inflation and economic outlook amid the US-Israeli war with Iran.

Expectations for Federal Reserve easing have also been scaled back, with markets now assigning about 25 basis points of cuts this year. Traders are pricing in almost two European Central Bank rate hikes in 2026, a sharp shift from the roughly 50% chance of a cut seen before the conflict began.

The Australian dollar strengthened 0.06% versus the greenback to USD 0.7106. New Zealand’s kiwi weakened 0.02% to USD 0.5856.

In cryptocurrencies, bitcoin fell 0.48% to USD 74,193.50 and ether declined 0.04% to USD 2,327.66.

(Reporting by Rocky Swift; Editing by Sam Holmes)

US stock market crash fears ease even as Middle East war rages on

NEW YORK – Options traders’ fears of a US stock market crash have pulled back nearly to levels seen before the US-Israeli attacks on Iran that made oil prices soar.

The Nations TailDex Index and the Cboe Skew Index, two separate gauges that measure how much traders are paying for crash protection, have retreated to near where they stood before the February 28 strikes on Iran. The S&P 500 is still down 2% from pre-war levels.

“TDEX is signaling that investors are now less worried about a “tail event,” or a really steep drop in equity prices, than at any point since the war started,” said Scott Nations, president of Nations Indexes, an independent developer of volatility and option strategy index products.

“Given the muted response from the S&P 500, this outlook makes sense, but it’s an important metric to watch,” he said.

On Monday, the TailDex index was at 18.84, just below its closing level of 19.01 on February 27. The Cboe SKEW index finished at 141.49 on Monday, down from 146.67 prior to the air strikes.

Both indexes soared to multi-month highs as soaring oil prices unleashed fear of a sizeable pullback in markets.

The cost of deep out-of-the-money S&P 500 puts – contracts that would offer protection against a 20% drop in the market over the next three months – stands just slightly higher than it was immediately prior to the strikes, according to Susquehanna Financial Group strategist Christopher Jacobson.

“After hitting multi-year highs at times last week, S&P skew levels have declined incrementally as some of that downside tail bid has faded alongside,” Jacobson said.

While fear of a market crash has faded, market anxiety levels are still higher than they were in early February. Nor are investors rushing to bet on a sharp rebound in stocks past old highs.

“We haven’t really seen that skew shift back towards the upside tail,” Jacobson said.

(Reporting by Saqib Iqbal Ahmed; editing by Andrei Khalip)

Yields mixed as PCE eases fears but oil keeps markets cautious

NEW YORK – US Treasury yields were mixed on Friday after data showed the Federal Reserve’s preferred inflation measure was in line with economists’ expectations in January, while concerns over oil prices kept investors nervous about an uptick in price pressures.

The Personal Consumption Expenditures price index increased 0.3% in January after rising 0.4% in December. Excluding the volatile food and energy components, the PCE price index rose 0.4% after a similar gain in December.

“The January core PCE wasn’t quite as bad as feared,” said Matt Bush, US economist at Guggenheim Investments.

The two-year note yield, which typically moves in step with Fed interest-rate expectations, fell three basis points to 3.732%. The yield on benchmark US 10-year notes rose one basis point to 4.283%.

The yield curve between two- and 10-year notes steepened by around three basis points to 55 basis points.

Traders this week have pushed back expectations on when the US Fed will cut rates as oil prices jump on supply disruptions caused by the US-Israeli war on Iran.

Crude futures climbed on Friday as the Strait of Hormuz remained closed, but analysts were wary the weekend might bring surprise changes in the status of the war two weeks after it started.

Traders are pricing in 22 basis points of cuts by year-end, down from more than 50 basis points before the war broke out, indicating rising doubts the Fed will make a second 25-basis-point cut by end-2026.

Some analysts and economists view the pricing as potentially having gone too far.

“You would need to see a very large rise in energy sustained for several months to really have a meaningful impact on core inflation,” said Bush, adding, “The second component here is that an energy shock also is negative for economic growth in the labor market.”

“The labor market has already been in a fragile spot. So it’s not clear-cut to me that higher oil prices would necessarily lead to a tighter path for Fed policy, given both sides of their dual mandate are going to be affected,” Bush said.

Concerns over the recent surge in oil prices have largely overshadowed an unexpectedly weak
jobs report for February.

“Front-end USD rates are likely to continue to trade with energy prices over the near term, however a protracted conflict can shift the focus from inflation to growth,” Wells Fargo macro strategists said on Friday in a report.

Other data on Friday showed that US economic growth slowed more sharply in the fourth quarter than initially thought, while US job openings increased in January, though hiring was lackluster.

The Fed is expected to keep interest rates unchanged at the conclusion of its two-day meeting on Wednesday.

Traders will focus on comments from Chair Jerome Powell for clues on how higher oil will impact Fed policy going forward. Policymakers will also update their interest rate and economic forecasts.

However, “The Fed has a relatively high bar to out-hawk market expectations,” Wells Fargo said.

(Reporting by Karen Brettell; Editing by Pooja Desai and Sharon Singleton)

Gold slips and heads for second consecutive weekly fall

Gold prices slipped on Friday and were on track for a second consecutive weekly decline, pressured by a stronger dollar and inflation worries driven by the Iran war, which weighed on rate‑cut expectations.

Spot gold fell 0.5% to USD 5,052.15 per ounce, by 1:44 p.m. ET (1744 GMT), and was down over 2% for the week so far.

US gold futures for April delivery settled 1.3% lower at USD 5,061.70.

“While the market remains strongly bullish gold long term on asset allocation drivers, bullion is grinding towards lows since the Iran conflict started with the dollar at nearly four-month highs,” said Tai Wong, an independent metals trader.

The US dollar was on course for a weekly rise, making greenback-priced bullion less affordable for other currency holders.

Commerzbank in a note said expectations of a more restrictive monetary policy are the main reason why the price of gold has come under pressure.

While gold is prized as a traditional hedge against inflation and periods of uncertainty, elevated rates typically curb its appeal by increasing the cost of holding bullion.

Data showed US consumer spending increased slightly more than expected in January, which together with continued strength in underlying inflation and the war in the Middle East bolstered economists’ views that the Federal Reserve would not resume cutting interest rates for some time.

President Donald Trump said the US was going to be hitting Iran “very hard over the next week”, shortly after issuing a partial 30-day waiver for purchases of sanctioned Russian oil.

Oil prices dipped but were on track for weekly gains as Gulf disruptions due to the conflict broadly persisted.

Elsewhere, resumption of some flights from Dubai has allowed gold flows from this major global trading hub to restart partially this week, three sources told Reuters.

Among other metals, spot silver lost 3.3% to USD 81.00.

Platinum fell 4% to USD 2,047.20 and palladium shed 2.5% to USD 1,569.00. The sister metals are on track to post weekly losses.

(Reporting by Ashitha Shivaprasad in Bengaluru; Editing by Krishna Chandra Eluri and Alan Barona)

Investors await Fed rate outlook as Iran war keeps markets on edge

NEW YORK – Investors will seek clarity in the coming week on how much the Middle East conflict is complicating expectations for interest-rate cuts this year, as they brace for developments in the Iran war that could rattle markets.

US Federal Reserve policymakers meet for the first time since the US and Israel began air strikes on Iran about two weeks ago, setting off a surge in oil prices that has reverberated across assets.

Fed members will grapple in their two-day meeting with questions about the energy shock’s impact on inflation and economic growth. The central bank will release economic projections on Wednesday. Markets are now pricing in tempered hopes for rate cuts in the wake of the conflict, even as expected cuts have been a key source of optimism for bullish stock investors this year.

“The Fed is going to be front and center, especially given the fact that we have seen the market push back… these rate cut expectations,” said Angelo Kourkafas, senior global investment strategist at Edward Jones.

US stock indexes have fallen and equity volatility has ratcheted higher since the Iran war began. Investors are fixated on the massive moves in oil prices, with US crude soaring close to USD 120 a barrel to start the week, and settling on Friday near the closely watched USD 100 level. Iran said the world should be ready for oil at USD 200 as its forces hit merchant ships during the week.

The benchmark S&P 500 ended on Friday, down about 5% from its record closing high from late January, as it posted its third straight weekly decline.

“We’re seeing wild swings in the market as traders are latching on to any hint of developments, positive or negative, on the Iran conflict,” said Sid Vaidya, chief investment strategist at TD Wealth.

FED ON HOLD FOR LONGER?

The Fed is widely expected to hold interest rates steady for a second straight meeting when it gives its policy statement on Wednesday. The central bank lowered rates last year to shore up a weakening labor market, but paused its easing cycle in January as it noted risks to employment and inflation had diminished.

Investors have been assuming more rate cuts are coming this year, which would be expected to support prices for stocks and other assets. Those expectations have been dialed back due to fears that the surge in energy prices will push up inflation.

“We believe this will just keep the Fed in a holding pattern for longer,” Vaidya said.

At the same time, a surprisingly weak jobs report for February could encourage the Fed to maintain a bias toward easing.

Fed funds futures on Friday were pricing in slightly less than one standard quarter-percentage point cut by December, down from two such cuts as of late February before the war began, according to LSEG data.

FED PROJECTIONS, POWELL COMMENTS IN FOCUS

As part of its meeting, the Fed will release updated projections from policymakers on their future expectations for rates, as well as for inflation and the labor market. Fed Chair Jerome Powell’s press conference on Wednesday, following the central bank’s policy statement, also could shed light on how Fed members are viewing the impact of the conflict.

“I think it’s going to set the table for the year and how to look at inflation being induced by oil prices,” said Paul Nolte, senior wealth adviser and market strategist at Murphy & Sylvest Wealth Management.

For Powell, it will be his second-to-last meeting before his term as chair expires in May. The next rate move may not come until President Donald Trump’s nominee for Fed chair, former Fed Governor Kevin Warsh, is expected to have taken over the helm of the central bank.

In the coming week, Nvidia’s annual developer conference also could bring renewed focus to the artificial-intelligence trade, which sparked volatility for technology and other shares earlier in the year.

But investors expect Iran-related news will remain prominent.

“Headlines continue to drive market movements as investors wait for greater clarity on the timing of a US exit strategy,” Adam Turnquist, chief technical strategist for LPL Financial, said in a written commentary on Thursday.

(Reporting by Lewis Krauskopf; Editing by David Gregorio)

Crude futures turn positive on continued Hormuz closure

HOUSTON – Crude futures climbed higher on Friday as the Strait of Hormuz remained closed, but analysts were wary the weekend might bring surprise changes in the status of the war two weeks after it started.

Brent futures for May settled at USD 103.14 a barrel, up USD 2.68, or 2.67%. US West Texas Intermediate (WTI) crude for April finished at USD 98.71 a barrel, up USD 2.98, or 3.11%.

Prices were down early on Friday on an erroneous report that an Indian-flagged tanker had sailed through the Strait of Hormuz, which has been shut since the war began.

Once it became clear the tanker sailed from Oman and had not passed through the strait prices began rising, turning positive before midday.

Brent rose 11.27% from its finish on March 6 while WTI gained 8% from its value a week ago.

As part of efforts to lower fuel prices to consumers in an election year, the US issued a 30-day license for countries to buy Russian oil and petroleum products stranded at sea. Treasury Secretary Scott Bessent said it was a step to stabilise global energy markets roiled by the US-Israeli war on Iran.

This will affect 100 million barrels of Russian crude, equal to almost a day’s worth of global output, according to Russia’s presidential envoy Kirill Dmitriev.

“Russian oil was already going to buyers; this is not bringing additional barrels to the market but it does reduce some friction,” said Bjarne Schieldrop, chief commodities analyst at SEB.

“The market is starting to get very concerned that this (war) is going to last longer. The big fear is that we have severe damage to oil infrastructure, which would be a lasting loss of supply.”

OIL TO BE RELEASED FROM STOCKPILES

The announcement on Russian oil came a day after the US Energy Department said Washington would release 172 million barrels of oil from its Strategic Petroleum Reserve to help curb skyrocketing oil prices.

That plan was coordinated with the International Energy Agency, which has agreed to release a record 400 million barrels of oil from strategic stockpiles, including the US contribution.

Fleeting relief sparked by the IEA release, however, was shattered by a re-escalation of Middle East risks, IG analyst Tony Sycamore said in a note.

Iran’s new Supreme Leader Ayatollah Mojtaba Khamenei said Iran would fight on, and keep the Strait of Hormuz shut as leverage against the United States and Israel.

Two fuel tankers in Iraqi waters were struck by explosives-laden Iranian boats, Iraqi security officials said on Thursday. An Iraqi official told state media the country’s oil ports have completely stopped operations.

US President Donald Trump said on Thursday the United States stood to make significant money from oil prices, driven higher by the war with Iran. But stopping Iran from getting nuclear weapons was far more important, he said.

Both benchmark prices surged more than 9% on Thursday and hit their highest levels since August 2022.

Goldman Sachs predicted on Friday that Brent oil would average more than USD 100 a barrel ‌in March and USD 85 in April, as energy prices remain volatile due to the Iran war, damage to Middle East energy infrastructure and disruptions in the Strait of Hormuz.

Brent is better supported than WTI because Europe is more susceptible to energy security issues, while the US is able to stave off its exposure due to its domestic output, said Emril Jamil, senior analyst at LSEG.

In another sign the disruptions may drag on, sources told Reuters that Iran had deployed about a dozen mines in the strait, a move that is likely to complicate the reopening of the critical waterway.

(Reporting by Erwin Seba in Houaton, Anna Hirtenstein in London, Jeslyn Lerh in Singapore, Sam Li and Lewis Jackson in Beijing; Editing by Pooja Desai, Susan Fenton, Aidan Lewis, and Diane Craft)

Shares skid, oil surges again as Iran attacks Gulf shipping

SYDNEY – Shares fell in Asia on Thursday as oil prices jumped on reports that more ships had been struck in the Strait of Hormuz and in Iraqi waters, fuelling inflation and pushing borrowing costs higher worldwide.

US crude rose 7.5% to USD 93.80 a barrel, extending a rise of more than 4% overnight. Brent crude futures jumped 7.7% to USD 99.03 a barrel.

That was despite plans from the International Energy Agency to release 400 million barrels of oil from its reserves, the largest such move in its history. The US said it would release 172 million barrels of oil from next week, as part of the IEA plan.

Two fuel tankers in Iraqi waters had been struck by explosive-laden Iranian boats, Iraqi security officials said early on Thursday, while an Iraqi official told state media that oil ports “have completely stopped operations.”

“Multiple tankers loaded with Iraqi crude are now reported burning in the Persian Gulf off the coast of Basra, engulfed in flames and leaking burning oil into the water,” said Tony Sycamore, analyst at IG.

“This appears to mark a direct and forceful Iranian response to the IEA’s overnight announcement of a massive strategic reserve release aimed at cooling runaway prices.”

Iran had earlier stepped up attacks on merchant ships in the Strait of Hormuz, telling the world to get ready for oil at USD 200 a barrel. On Wednesday, three vessels were reported to have been hit in Gulf waters as Iran’s Revolutionary Guards said their forces had fired on ships in the Gulf that had disobeyed their orders.

US President Donald Trump on Wednesday declared the war on Iran has been won but he will stay in the fight to finish the job, throwing more uncertainty in the mix.

All of this was bad for shares. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.8%, while the Nikkei dropped 1.6% as Japan is a major importer of oil and gas.

Both S&P 500 futures and Nasdaq futures fell 0.8%. Over in Europe, EUROSTOXX 50 futures fell 0.6% and DAX futures slid 0.8%.

INFLATION RISKS

US data showed the consumer price index rose 0.3% in February, in line with forecasts and above January’s 0.2% increase, but it was rendered obsolete given the Iran war has fuelled inflation.

In bond markets, the risk of rising inflation outweighed safe-haven considerations to shove yields higher globally. Yields on 10-year Treasury notes rose 4 basis points to 4.2472% on Thursday, having jumped 6 bps overnight.

Fed funds futures extended their slide as investors feared higher inflation would make it harder for the Federal Reserve to ease policy. Markets are just wagering one more rate cut from the Fed this year.

The danger of energy-driven inflation has led markets to wager the next move in rates from the European Central Bank could be up, possibly as early as June.

Nervous investors sought the liquidity of dollars while shunning currencies from countries that are net energy importers, including Japan and much of Europe.

The euro slipped 0.3% to USD 1.1536, after closing at the weakest level since November last year. The dollar inched up 0.1% to 159.12 yen, the strongest level since January when reported rate checks from the US Fed spooked yen bears.

The risk sensitive Australian dollar lost 0.4% to USD 0.7127, having hit a more than three-year high of USD 0.7188 on Wednesday as bets for an imminent rate hike from its central bank grew.

(Reporting by Stella Qiu; Editing by Lincoln Feast)

Yields gain as oil rally dims hopes for Fed rate cuts

NEW YORK – Two-year yields hit a five-month high on Wednesday as higher oil prices stoked inflation fears and pushed back expectations for Federal Reserve rate cuts, with traders largely looking past February consumer price inflation data that was in line with economists’ expectations.

US consumer prices picked up last month as the cost of gasoline increased in anticipation of an escalating war in the Middle East. The Consumer Price Index rose 0.3% last month after gaining 0.2% in January. Excluding the volatile food and energy components, the CPI gained 0.2% after rising 0.3% in January.

“The thing about this number, however, is that it’s very much in the rear-view mirror because it’s a February number and there’s stuff going on at the moment, which puts upward pressure on prices going forward, clearly given the war in Iran,” said Padhraic Garvey, regional head of research Americas and head of global rates and debt strategy at ING.

The International Energy Agency on Wednesday agreed to release 400 million barrels of oil, the largest such move in its history, to try to rein in crude prices that have soared due to supply shocks from the US-Israeli war with Iran.

Traders have pushed back expectations of the next Fed rate cut to September on concerns that the war will last longer than hoped. If it continues, higher oil prices are also likely to dent economic growth and send yields lower.

“It’s probably going to hurt the economy,” said Garvey. However, right now, “the market is saying we’re going to have an inflation issue, but this is not necessarily a big hit to activity.”

Fed funds futures traders are pricing in 32 basis points in cuts by year-end, down from 41 basis points on Tuesday, indicating rising doubts that the Fed will make two 25-basis-point cuts this year.

Economists at Morgan Stanley expect two Fed rate cuts this year, but note that this assumption “rests on the Fed ‘looking through’ oil price shocks to headline inflation.”

Risks to the outlook include the possibility that firmer inflation and low unemployment lead the Fed to push back cuts, but that it then still cuts to the same level, the economists said.

Alternatively, the Fed could remain on hold for longer if demand erodes more than expected. “In this case, the Fed not only cuts later, but it cuts by more to a lower trough,” Morgan Stanley said.

The 2-year note yield, which typically moves in step with Fed interest rate expectations, was last up 6.3 basis points at 3.632%. It earlier reached 3.648%, the highest since September 26.

The yield on benchmark US 10-year notes rose 7 basis points to 4.206% and earlier got to 4.226%, the highest since February 9.

The yield curve between two- and 10-year notes steepened by one basis point to 57 basis points.

Benchmark US Treasury yields will drift only slightly higher over the coming months despite potential inflationary pressures sparked by the war in Iran, according to a Reuters poll of bond strategists who have barely changed their forecasts from last month.

There was soft demand for the Treasury’s USD 39 billion sale of 10-year notes, the second sale of USD 119 billion in coupon-bearing supply this week.

The notes sold at a high yield of 4.217%, around half a basis point above where they traded before the auction. Demand was 2.45 times the amount of debt on offer, up from 2.39 times in February, which was the weakest since August.

Interest was weak for the government’s USD 58 billion sale of three-year notes on Tuesday. It will also sell USD 22 billion in 30-year bonds on Thursday.

(Reporting by Karen Brettell in New York; Editing by Andrei Khalip and Matthew Lewis)

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