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The Fed, European Central Bank and the Bank of England all held rates this week as policymakers grapple with the uncertain outlook for inflation and growth arising from the conflict in the Middle East.
Yields in Europe and the US climbed across maturities, with those on two-year US Treasuries — especially sensitive to expectations for Fed policy — higher by 11 basis points to 3.89%.
As war in the Middle East sent oil prices soaring, stoking inflation fears, traders pushed back expectations for the Fed's next rate cut into next year.
Traders are now fully pricing in the next quarter-point rate reduction in mid-2027, and a growing chorus of Wall Street economists have also pushed their calls for the next cut further out the calendar.
Investors will likely demand higher compensation for longer-dated bonds. Combined with the inflationary pressures from surging energy prices, it's a volatile cocktail for fixed-income investors.
This month's slump in Treasuries "is really a deleveraging dynamic," with traders liquidating long positions as they price in fewer Fed cuts and the risk of hotter inflation.
Treasury yields are up almost a quarter percentage point since the war in Iran started, while traders have pushed back bets on the timing of the Federal Reserve's next interest-rate cut and hikes.
Meanwhile, the February US employment report to be released Friday is expected to show deceleration in job growth, potentially reviving the case for Fed rate cuts.
Traders priced in about 50% odds of more than one quarter-point rate cut by the Fed this year, after fully pricing in two cuts as recently as Friday.
Treasury and European bond yields rose as traders scaled back wagers on interest-rate cuts in the US, UK and euro area.
During a month when warning signs flashed alarms in other markets traders flocked to US government debt.
Bonds were buoyed by a rally in the UK market, while Friday's month-end Treasury index rebalancing — incorporating sizable quarterly issuance — may trigger additional buying from passive investors.
Technology shares in the S&P 500 Index fell as much as 2.9% led by Nvidia Corp. shares, which slumped 5.6% after reporting quarterly results after the close Wednesday.
John Velis, Americas macro strategist at BNY, said the US can lean on T-bills to plug that "substantial" gap, helping to explain why the reaction in US Treasuries to Friday's ruling has so far been muted.
The rally, which drove the rate on the benchmark 10-year note down six basis points to 4.03%, gathered steam as stocks slid and worries mounted about potential US military strikes on Iran.
Minutes of the Federal Reserve's Jan. 27-28 policy meeting revealed several officials suggested the central bank may need to raise interest rates if price growth remains stubbornly high.
Yields rose across all tenors, pushing the rate on benchmark 10-year bonds to 4.08% and putting them on course for their first two-day increase since the start of the month.
Benchmark 10-year yields closed one basis point higher at 4.06%, while the policy-sensitive two-year yield climbed three basis points to 3.43%.
The path of US interest rates remains in focus following the slower-than-expected US inflation print as traders fully price a Fed cut in July.
Yields across maturities declined by at least three basis points Friday, led by shorter-maturity tenors that are most sensitive to Fed rate changes.
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