(March 16): The US Treasury market has erased all its gains for the year as the war-driven surge in oil prices sets investors panicking about both inflation and growth risks.
A Bloomberg gauge of its performance turned negative for the year at the end of last week, after losing 1.7% this month. It is a milestone that comes as stagflationary angst sends yields higher and forces Wall Street to reel in its expectations for lower interest rates in the US over the next year.
With crude around the most expensive since the aftermath of Russia’s invasion of Ukraine in 2022 — the last time US Treasuries and oil were correlated this closely — the threat of hotter inflation is top of mind for investors. And it will likely be the same for US Federal Reserve (Fed) officials as well when they meet this week.
“Energy-driven inflation and policy uncertainty continue to weigh on long-end Treasuries,” Morgan Stanley strategists including Bradley Tian wrote in a note.
US 10-year yields were two basis points lower at 4.25% at 6.30am in New York on Monday, though they were still up more than 30 basis points in March.
See also: US job openings broadly picked up in January, layoffs fell
Since the US attacked Iran, investors have been demanding higher yields as compensation for the risk that the spike in energy prices will lead to resurgent inflation and keep the Fed from cutting rates — even in the event of an economic slowdown. Bonds from the US to Japan and Australia have dropped, with a gauge of global debt also giving up its year-to-date gains.
“Geopolitical uncertainty and heightened cross-asset volatility are likely to persist in the near term until markets gain confidence in a stabilisation of the Iran conflict,” said Bob Savage, the head of markets macro strategy at BNY.
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