Treasuries-US yields steady as higher oil prices spur inflation worries; buybacks in focus

The Treasury Department will also sell $39 billion in 10-year notes on Wednesday, which may sell at the highest yield levels in an auction since 2007. The U.S. government saw solid demand for its $58 billion sale of 3-year notes on Tuesday and will also sell $22 billion in 30-year bonds on Thursday. U.S. Treasury yields were steady on Wednesday, with the benchmark 10-year yield hitting its highest level since 2023 before falling back, as oil prices hit a six-week high ahead of highly anticipated inflation data that analysts say will be key to the Federal Reserve's interest rate decision next week. Brent crude oil futures breached $100 a barrel to hit six-week highs on Wednesday as the intensifying conflict in the Middle East heightened concerns about oil flows, catching up to physical oil and fuel prices which already have passed the psychological threshold. “Today looks like a reaction to what's going on in the oil market,” said Lawrence Gillum, chief fixed income strategist for LPL Financial in Fort Mill, South Carolina. “The inflationary story is getting a little stickier, and that could cause the Fed to hike rates.” The move in yields occurred ahead of the release of producer price and consumer price inflation reports on Thursday and Friday, respectively. Analysts said the data will play a key role in whether the Fed hikes rates at its September 15-16 meeting. Rising oil prices have reignited concerns that higher fuel costs will flow through to consumer inflation and add to inflation that is already running above the U.S. central bank's 2% annual target. Traders raised bets on a rate hike at the Fed's meeting next week after the Labor Department reported on Friday that employers added far more positions than expected in August. Fed funds futures traders are now pricing in 59% odds of a rate hike next week. On Wednesday, traders were also waiting for the U.S. Treasury Department to provide details on its bond buyback plans. Treasury Secretary Scott Bessent had announced in August that the government would double the size of buybacks on longer-dated securities over the next quarter to at least $4 billion per operation. Coming after a selloff that pushed 30-year yields to their highest level since 2007, the buybacks are an effort to support liquidity in long-dated debt securities with “strong sponsorship,” the Treasury said. Some investors are hoping the buybacks could be as high as $10 billion, according to Gillum. “If the announcement comes in at $10 billion, markets will be more sure that Treasury is concerned about rising yields and will likely continue to push back on higher yields,” Gillum said. “But if it comes in around that $4 billion number, then markets could be disappointed and you could see the back end of the curve move higher. Right now, what we're seeing is the front end is selling off on oil concerns, but the back end is not moving much because of those buyback uncertainties.” The yield on benchmark U.S. 10-year notes was last up 0.23 basis points to 4.806% and reached 4.8184%, the highest level since November 2023. The 30-year bond yield fell 1.22 basis points to 5.2518%. The 2-year note yield, which typically moves in step with interest rate expectations for the Fed, rose 1.69 basis points to 4.415% and earlier hit its highest level since January 2025. 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 38.9 basis points.

Treasuries-US yields steady as higher oil prices spur inflation worries; buybacks in focus

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