The Treasury market rally that sent yields to the lowest closing levels in more than two weeks stalled Wednesday as oil prices steadied with Middle East supply curtailed by the US war on Iran.
US government bond yields were two to three basis points higher on the day at mid-morning in New York. Tuesday's closing levels, the lowest since mid-March, were reached amid a nearly 8% slide in the price of the US benchmark oil futures contract. Oil prices stabilized on Wednesday.
The roughly 30% surge in crude prices since the US attacked Iran at the end of February has become the dominant driver of Treasury yields. The related surge in retail gasoline prices is driving steep increases in consumer inflation gauges, wiping out expectations for Federal Reserve interest-rate cuts that previously had been anticipated this year.
Treasury yields reached their highest levels of the year on March 27, with several tenors higher by about 50 basis points since the war started. Their retreat from those levels initially reflected damage to the US economic outlook. At the same time, oil has retreated from its recent peaks on signs the US administration is seeking to end the crisis.
"I think it's a reflection of a general caution," Angelo Manolatos, an interest-rate strategist at Wells Fargo, said of the stalled bond rally. "With the spike in energy prices and inflation measures there's a high bar to return to late February levels."
Fed policymakers had already paused cutting interest rates in January on the view that their three quarter-point cuts in each of the previous two years had fostered improvement in the labor market. Meanwhile, the consumer inflation gauge they aim to keep at around 2% -- the price index for personal consumption expenditures -- rose 2.9% last year.
Different inflation gauges suggest that March data to be reported on April 30 will show an increase from that level. Based on consumer and producer price index data for March released in the past week, economists at Morgan Stanley forecast PCE price acceleration to 3.42% while those at Barclays predicted 3.5%.
Cleveland Fed President Beth Hammack, speaking on CNBC Wednesday, said policymakers were likely "to remain on hold for a good while," amid "two sided risk to rates" that could require either a cut or a hike as the next move.
Short-term interest-rate futures contracts price in a roughly one-in-three chance of a quarter-point cut this year, and fully price one in by September 2027. Before the oil price surge, two quarter-point cuts were fully priced in for this year.