U.S. Treasury yields moved higher Monday as investors weighed the implications of more costly energy prices on the general level of inflation as a result of the Iran war.
The 2-year Treasury yield moved up more than 6 basis points to 3.954%, the benchmark 10-year note yield rose more than 6 basis points to 4.442%, and the 30-year bond yield gained more than 5 basis points to 5.021%.
One basis point equals 0.01 percentage point, and yields and prices move in opposite directions.
Oil prices climbed rose after the United Arab Emirates said Monday that it intercepted Iranian missiles for the first time since the start of the ceasefire between the U.S. and Iran. U.S. West Texas Intermediate crude futures settled up 4.39% at $106.42 per barrel, while Brent crude, the global benchmark, climbed 5.8% to settle at $114.44.
Fixed income yields had risen earlier Monday following conflicting claims out of the Strait of Hormuz at the entrance to the Persian Gulf, through which 20% of the world's crude oil flowed before the war began in late February. Iranian state media said the Islamic Republic hit a U.S. warship in the area, but the U.S. Central Command later denied the report.
"Energy-driven inflation is straining the consumer engine globally," said Ameriprise chief market strategist Anthony Saglimbene. He also said, "The consumer engine is still running, but it's running without a full tank of gas. Importantly, this isn't just a domestic dynamic, in our view. Every major central bank that met last week held rates steady and leaned hawkish."
Bond traders are also awaiting data later in this week that will provide more clues on the muddy U.S. jobs picture.
April nonfarm payrolls are set for release by the Bureau of Labor Statistics on Friday, with economists surveyed by Dow Jones expecting a gain of just 53,000 following the 178,000 jobs added in March. The unemployment rate is expected to hold steady at 4.3%.
Markets have been weighing how the Federal Reserve will react to an economic picture that includes inflation staying above the central bank's 2% target for several years, and mixed messages as to the state of U.S. employment.
The rate-setting Federal Open Market Committee next meets June 16-17, and interest rate futures traders are nearly unanimous in pricing in no change to the Fed's 3.50% to 3.75% overnight fed funds rate, based on the CME Group's Fedwatch tool. Last week's final FOMC meeting under outgoing chair Jerome Powell, as well as subsequent statements from three officials, expressed misgivings about the direction of monetary policy.
Regional presidents Neel Kashkari of Minneapolis, Lorie Logan of Dallas and Beth Hammack of Cleveland all indicated that they objected to an apparent easing bias expressed in the committee's post-meeting statement. Kashkari said Sunday in an appearance on CBS's "Face the Nation" that he could actually see a rate increase as the next policy move, in the worst-case scenario — if inflation holds at elevated levels.