TREASURIES-Yields rise further as uncertainty persists around Iran conflict

Updates throughout with latest market activity, adds comments in 13 & 14

By Matt Tracy

WASHINGTON, March 26 – U.S. Treasury yields rose further on Thursday as ongoing Middle East tensions drove investor concerns about higher oil prices and persistent inflation.

The benchmark U.S. 10-year Treasury yield US10YT=RR on Thursday was last up 7.8 basis points at 4.404%. The two-year note’s yield US2YT=RR was last up 8.6 bps at 3.967%.

Investors have weighed the impact of a continued back-and-forth between the U.S. and Iran this week. It has sent mixed signals about the possibility of a conclusion to war in Iran that began at the end of last month with coordinated attacks by the U.S. and Israel.

U.S. President Donald Trump on social media has this week repeatedly claimed progress in peace talks with Tehran. But Iran’s foreign minister told Reuters that messages exchanged between the two countries “does not mean negotiations with the U.S.”.

During a Thursday Cabinet meeting, Trump cast doubt on the prospect of a peace deal. “In the meantime, we’ll just keep blowing them away,” he said.

AIRSTRIKES ARE EXPECTED OVER THE COMING DAYS

Continued airstrikes and the landing of U.S. ground troops are reportedly expected in the region in the coming days as Iran has refused to re-open the Strait of Hormuz, which is the route for much of the world’s oil supply.

“Mideast tensions have bond yields rising due to higher oil prices where Brent crude is at $106, up $4 overnight,” wrote Tom di Galoma, managing director of global rates trading at broker-dealer Mischler Financial Group, in a note on Thursday.

“Yields rose during the APAC and EMEA sessions as banks and money managers liquidate bond holdings ahead of this weekend’s airstrikes.”

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=RR, viewed in the markets as an indicator of economic expectations, was last at 43.64 basis points.

Elevated oil prices have raised concerns of persistent inflation, with U.S. rate futures beginning last week to price in the possibility of an interest-rate hike later this year. Markets last priced in a 95.9% chance of no hike for the Fed’s April meeting and a 32.6% chance of a hike by the end of the year.

Data on Thursday showed new U.S. jobless claims rose slightly last week to a seasonally adjusted 210,000, which was in line with economists’ forecasts.

The Treasury Department on Thursday auctioned $44 billion in seven-year notes US7YT=RR to tepid demand. Its 2.43x bid-to-cover ratio, a key indicator of demand, was slightly below the 2.5x average for similar auctions. Seven-year yields rose following the auction and were last up 10.7 bps at 4.253%.

The auction follows earlier sales this week of two- and five-year notes US5YT=RR that met soft demand.

“I think the auction results…definitely contributed to the selling pressure that was already associated with the jump in oil prices,” said Vail Hartman, U.S. rates strategist at BMO Capital Markets.

“So the auctions were just a compounding factor for the sell-off associated with geopolitics.”

(Matt Tracy in Washington; editing by Barbara Lewis and Hugh Lawson)

((Matt.Tracy@thomsonreuters.com; +1 571 643 3562))