Treasuries-30-year yield set for longest run above 5% since 2007

Traders are pricing in a 33.7% chance of a rate hike at the Fed meeting next week, up sharply from 11.8% a week ago, according to the CME FedWatch tool.

The shift reflects the market's struggle to reconcile benign economic data with a more hawkish tone from the Fed and higher oil prices.

While U.S. consumer inflation slowed more than expected in June, policymakers have warned the war could keep oil elevated and push prices higher.

"The muscle memory of recent years has kept many allocators from noticing the merits of fixed income," strategists at PIMCO wrote in a note, referring to the bond selloff in 2022 when the Fed raised rates to contain price pressures stemming from the COVID-19 pandemic and Russia's invasion of Ukraine.

The U.S. government will sell $21 billion in 10-year Treasury Inflation-Protected Securities later on Thursday. Demand for the debt could come under scrutiny, given the concern about inflation.