Market News

(Bloomberg) -- US Treasuries fell for a second day as surging oil prices prompted traders to curb bets on more than one Federal Reserve interest-rate cut this year.

The declines were subsequently pared as investors weighed the potential for rising energy prices to derail economic growth, and amid stabilization in oil and US stocks. The two-year note’s yield, more sensitive than longer maturities to Fed policy shifts, remained less than three basis points higher near 3.50%.

Earlier, the two-year yield jumped as much as 12 basis points to 3.59%, approaching its highest level this year. Traders, who as recently as Friday were fully pricing in two Fed rate cuts this year, trimmed the odds of a second cut to about 80%.

“The market is thinking about inflation,” Bhanu Baweja, chief strategist at UBS, said. The move in bonds, however, “is overdone. If the oil problem persists, it’ll become a growth problem. The Fed can sit tight for now, but will turn dovish incrementally afterwards.”

In an abrupt reversal of fortune for the Treasury market — where benchmark yields reached their lowest levels in months early Monday in a burst of haven demand after the US and Israel struck Iran over the weekend — the subsequent surge in energy prices has threatened to halt progress toward lower inflation that allowed the Fed to cut interest rates three times last year.

While the central bank paused lowering rates in January and as of last week wasn’t expected to resume until its July meeting, the consensus view has since shifted to September.

“The Fed will view it as a shock to the system as energy prices move higher,” said Gregory Faranello, head of US rates at Amerivet Securities. “But they were already on hold. It’s fair to price out further rate cuts. It was fair even before the recent events.”

Speaking Tuesday, Minneapolis Fed President Neel Kashkari said the conflict and its potential inflationary consequences made him less certain of his view that a rate cut was likely this year.

Investors are dumping bonds globally on fears that the war will stoke inflation, altering the course of monetary policy. Wagers on a prolonged period of steady interest rates — or in the case of the Fed, further cuts — are being reassessed as the conflict has impeded supply from the region and unleashed a surge in oil and natural gas prices.