U.S. Treasury yields advanced on Monday as market participants assessed the likely duration of shipping disruptions through the Strait of Hormuz and the potential knock-on effects of higher energy prices on inflation and monetary policy.
The benchmark 10-year Treasury note yield rose 3.4 basis points to 4.412%, while the 30-year bond yield increased 3.1 basis points to 4.997%.
Oil eased from earlier peaks after the U.S. military reported that two Navy guided-missile destroyers entered the Gulf to counter what was described as an Iranian blockade, enabling two U.S. merchant ships to transit the Strait of Hormuz. Iran had previously said it prevented a U.S. warship from entering the Gulf. Despite the retreat from intraday highs, crude prices remained above $100 per barrel.
Market observers noted that these developments are being watched for their potential to lift headline inflation, which could complicate the outlook for interest-rate policy.
"In the interest rate market, we have rising inflation expectations ... and so that’s driving some modest upward pressure on 10-year Treasury yields, but at the same time, yields remain range-bound," said Bill Merz, head of capital markets research at U.S. Bank Wealth Management in Minneapolis.
Treasury yields have risen steadily since the U.S.-Iran conflict started in late February, as concerns about higher prices have reduced market expectations for Federal Reserve rate cuts this year.
Merz added that the apparent strength in energy prices makes it more difficult for the Fed to move toward rate cuts: "It makes sense that it’s harder for the Fed to cut rates as energy prices are rising so much that’s prompting headline inflation to creep higher. That being said, we haven’t seen a significant amount of follow-through in core inflation," he said.
Investors and policymakers will be watching both the persistence of shipping disruptions through the Strait of Hormuz and incoming inflation data for signals about whether energy-driven price pressure will translate into sustained inflationary trends that could influence the Fed's timing on easing.