US Treasury yields top 4% a year… ‘inflation fears’ spread amid an oil shock

10-year yield posts biggest rise since June

Global oil prices jump on Middle East tensions

US gasoline prices also move above $3

With oil prices surging in the wake of the US attack on Iran, concerns are spreading that inflation in the United States could re-ignite. US Treasuries—once viewed as safe-haven assets—saw their heaviest selling in nine months, and the 10-year US Treasury yield quickly climbed above 4.05% a year.

On the 2nd (local time), the 10-year US Treasury yield stood at 4.051%, up 9 bp (1 bp = 0.01 percentage point) from the previous session around the close of US stocks in New York. That marked the biggest one-day increase since June last year. It surged as high as 4.067% intraday.

The Treasury selloff was triggered as military clashes involving Iran extended into a third day. As Middle East tensions intensified and global oil prices spiked, markets judged that inflationary pressures could return. Analysts say the war could stoke US prices, as it is likely to be accompanied by expanded fiscal spending and supply-chain disruptions. Harley Bassman, managing director at Simplify Asset Management, told MarketWatch, “War ultimately burns money, so it can fuel inflation,” adding, “The key is how long this conflict lasts.”

Such unease in the bond market had been detected even before the US struck Iran. The ICE BofA MOVE index, which reflects expected interest-rate volatility over the next 30 days, jumped to a year-to-date high on the day. The producer price index (PPI) for January, released last week, also rose more than expected, adding to upward pressure on yields.

Until recently, worries about an oversupply of crude had helped cap inflation. But the picture flipped as investors began pricing Middle East risks into oil. Brent and West Texas Intermediate (WTI) rose to their highest levels since June last year.

Angelo Kourkafas, senior global investment strategist at Edward Jones, said, “The rise in oil prices over the past few months is stoking inflation pressures in the short term,” adding that, combined with geopolitical uncertainty, it could make it harder for the US central bank (the Fed) to decide to cut rates. He added that while the Fed may view it as a temporary factor, the near-term environment could make it difficult to move toward rate cuts.

As geopolitical tensions rose, the average US gasoline price on the day topped $3 per gallon (0.02 barrel) for the first time since November last year. According to Reuters, experts forecast that gasoline prices could climb to $3.25 per gallon this week, reflecting a tendency for US retail gasoline prices to rise by 25 cents per gallon for every $10 increase in crude oil per barrel.

Gasoline prices are an inflation gauge consumers feel acutely. If oil keeps rising, it could become a political burden for the Donald Trump administration ahead of the November midterm elections. The Wall Street Journal (WSJ) noted, “Given that high energy prices dealt a major blow to the previous president, President Trump is taking a big gamble ahead of the midterms.”

On the day, US Secretary of State Marco Rubio said, “We expected (energy prices in the US) could become an issue,” adding, “We will implement phased measures starting tomorrow to ease it.”

New York = Park Shin-young, correspondent / Han Kyung-je reporter nyusos@hankyung.com