(Updates to afternoon New York trading)
* Middle East tensions drive oil prices higher, fueling inflation concerns
* US economic data beats forecasts, with strong private payrolls and factory orders
* Fed’s Williams sees no need to change rates despite inflation risks
NEW YORK, June 3 (Reuters) – U.S. Treasury yields rose on Wednesday as rising hostilities in the Middle East following strikes by both the U.S. and Iran sent oil prices higher and reignited worries about sustained inflation pressures.
The yield on the benchmark U.S. 10-year Treasury note rose 3.4 basis points, its biggest daily gain in two weeks, hitting 4.489% after climbing to 4.499% on the session.
After hitting a 16-month high of 4.687% on May 19, the benchmark yield had been in a downtrend on optimism that the U.S. and Iran would reach an agreement that would reopen the crucial Strait of Hormuz. But diplomatic efforts appear to have stalled, as Iranian attacks on Kuwait damaged its airport and injured dozens, while the U.S. military carried out strikes near Hormuz, which prior to the war was the transit point for one-fifth of the world’s oil and gas supply.
“For the most part, everybody’s eyes are on what’s going on in the Mideast and will continue to be,” said Tom di Galoma, managing director at Mischler Financial Group in Stamford, Connecticut.
“As the war lingers, rates will go higher. I’m looking for 10-year notes to get up to the 4.70% to 4.75% level.” U.S. crude rose 2.4% to $96 a barrel and Brent rose to $97.77 per barrel, up 1.8% on the day.
The yield on the 30-year bond gained 2.3 basis points to 4.99%.
PRIVATE EMPLOYMENT GAINS EXCEED EXPECTATIONS Federal Reserve Bank of New York President John Williams reiterated that he does not believe the U.S. central bank needs to change the setting of short-term interest rates despite upside inflation risks tied to the Middle East war and other forces.
After beginning the year pricing in roughly 50 basis points worth of cuts from the Fed this year, market expectations have shifted and are now pricing in about 20 basis points in hikes, according to LSEG data.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 40.7 basis points.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, advanced 2.9 basis points to 4.068%. U.S. private payrolls increased by 122,000 last month, according to the ADP national employment report, topping the 117,000 estimate of economists polled by Reuters, after a downwardly revised 105,000 gain in April. The report is a precursor to Friday’s government payrolls report.
The Institute for Supply Management’s nonmanufacturing purchasing managers index increased to 54.5 last month, besting the 53.8 estimate, from 53.6 in April. The Commerce Department said factory orders surged 4.8% in April, the largest increase since May 2025 and above the 4.6% forecast, after an upwardly revised 1.8% advance in March. The Fed’s “Beige Book” report of data from around the country showed economic activity increased a bit in recent weeks, employment was little changed, and the fallout from higher energy prices due to the war was pervasive.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.537% after closing at 2.534% on Tuesday.
The 10-year TIPS breakeven rate was last at 2.394%, indicating the market sees inflation averaging about 2.4% a year for the next decade.
(Reporting by Chuck Mikolajczak, Editing by Nick Zieminski and David Gaffen)
