(Bloomberg) — Treasuries fell, lifting yields to the highest levels in several weeks, as rebounding oil prices drove up inflation expectations and curbed expectations for Federal Reserve interest-rate cuts.
Yields across maturities rose, some by more than four basis points, as traders priced in reduced chances of a Fed rate cut before the end of next year. The two-year note’s yield, more sensitive than longer tenors to central bank policy shifts, topped 3.85% for the first time since April 7. US yields trailed steeper increases in most European bond markets.
Fed policymakers, convening Tuesday for what’s expected to be Jerome Powell’s final two-day meeting as head of the central bank, are widely seen leaving their target range for a US overnight lending rate at 3.5%-3.75%, where it’s been since December.
“Rising energy prices continue to set the agenda for the direction of US rates,” and crude prices are approaching “a level of inflection for inflationary angst,” Ian Lyngen, head of US rates strategy at BMO Capital Markets, said in a note. “The resulting tone in the Treasury market has been modestly bearish, although the price action has been relatively subdued.”
Oil benchmarks are 2% to 4% higher on the day amid the ongoing supply shock created by the US attack on Iran in late February, which has curtailed Middle East exports via the Strait of Hormuz. They retreated from session highs after the United Arab Emirates said it would leave the OPEC and OPEC producer groups on May 1, a move that will allow it to deploy new production capacity.
While oil prices remain below their March highs, key market-implied inflation expectations have risen to the highest levels in months, a development that’s likely to render Fed policymakers more cautious about cutting interest rates, even if labor-market conditions deteriorate.
The five-year swap rate for the US consumer price index — representing the expected average CPI rate over that time frame — topped 2.7% Monday for the first time since August 2025.
Swap rates linked to Fed policy decision dates rose as traders further abandoned wagers on easing. The contracts price in a roughly one-in-five chance of a quarter-point cut this year, versus fully pricing in two cuts at the start of the year.
At the same time, the Justice Department’s decision last week to drop a controversial probe into the Fed’s building renovations has opened a path for President Donald Trump’s nominee Kevin Warsh to gain approval from the Senate Banking Committee to be the next Fed chair. Warsh repeatedly pledged to act independently during a confirmation hearing last week, though he’s previously stated that interest rates should be lower.
“As and when Powell steps down, Warsh is highly likely to push the FOMC toward rate cuts,” said David Roberts, head of fixed income at Nedgroup Investments. He said expectations for lower rates may push bond yields in Group of Seven countries down by some 30 to 50 basis points.
The selloff boosted the yield for an auction of seven-year notes, the third and final longer-term Treasury debt sale this week. The auction result was 4.175%, about half a basis point higher than indicated by trading just before 1 p.m. New York time, the bidding deadline.
Sales of two- and five-year notes Monday were awarded at yields that also were slightly higher than anticipated, a sign of soft demand. All three sales showed improvement relative to last month’s, however.
(Adds auction result and updates yield levels.)
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