TREASURIES-Treasury yields advance for fourth day as oil prices raise inflation risk

Other data from the Labor Department showed import prices rose 0.2% last month, matching expectations, after an upwardly revised 0.2% gain in December, as a decline in the cost ⁠of energy products was more than offset by a surge in capital goods prices.

U.S. Treasury yields climbed for a fourth straight day ​on Thursday as the expanding war in Iran put upward pressure on ‌oil ​prices, stoking concerns about rising inflation and dampening expectations for Federal Reserve interest rate cuts. U.S. crude surged 8.91% to $81.29 a barrel and Brent rose to $85.61 per barrel, up 5.17% on the day, as more tankers came under attack in Gulf waters and the U.S.–Iran war escalated. Iranian drones entered Azerbaijan, threatening to spread the ‌crisis to more oil producers in the region. Crude prices have surged more than 18% since the war began last week.

The yield on the benchmark U.S. 10-year Treasury note rose 5 basis points to 4.132% after hitting a three-week high of 4.15%. The yield has shot up more than 17 basis points over the past four days, its biggest four-session rise since early July. "The surge in gasoline prices associated with the events in the Middle East ‌are clearly a concern for people who are anticipating a Fed reaction function," said Michael Green, chief market strategist at Simplify Asset Management in Philadelphia.

"The really critical thing is that fears of inflation are cutting ‌off people's expectations that the Fed cuts, that's really what's powering the curve more than anything else." Markets are currently pricing in roughly 40 basis points of cuts from the Fed this year, down from about 50 basis points before the war began, according to LSEG data.

The yield on the 30-year bond advanced 2.6 basis points to 4.743% after touching 4.772%, its highest since February 12. Expectations for a cut of at least 25 basis points at the Fed's June meeting have dropped to 32.2%, per CME's FedWatch Tool, down from ⁠47.4% a ​week ago and 75% a month ago. A closely watched ⁠part of the U.S. 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 54.4 basis points.

Recent economic data has also served to indicate price pressures remain while the ⁠labor market remains stable, making it less likely the Fed will see the need to reduce interest rates. The Labor Department said initial jobless claims in the week ended February 28were flat at a seasonally adjusted 213,000, slightly below the 215,000 estimate of ​economists polled by Reuters. Other data from the Labor Department showed import prices rose 0.2% last month, matching expectations, after an upwardly revised 0.2% gain in December, as a decline in the cost ⁠of energy products was more than offset by a surge in capital goods prices. In addition, worker productivity slowed to an annualized rate of 2.8% in the fourth quarter from an upwardly revised 5.2% pace in the third quarter, while unit labor costs increased at a rate of 2.8% ⁠after ​a previous decline of 1.8%. The data comes ahead of Friday's key government payrolls report, which will also shape expectations for the path of Fed policy.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, gained 4.4 basis points to 3.587%. The two-year yield has shot up nearly 22 basis points over the past four sessions, its largest four-day jump since mid-May. Fed officials have recently ⁠expressed views that it will take time to assess the impact of the Iran conflict on monetary policy decisions. However, Governor Stephen Miran said on Bloomberg TV on Wednesday that the war had not changed the ⁠need for interest rate cuts, while Richmond Fed President Tom ⁠Barkin said on Thursday that still-high inflation and stronger recent jobs numbers may shift the Fed's risk outlook at a time when the U.S. conflict with Iran could further push up key consumer prices. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.556%, its highest since January 30, after closing at ‌2.5% on Wednesday.

The 10-year TIPS breakeven rate ‌was last at 2.303%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)