US to deploy more troops to Middle East
Iran attacks Kuwait oil refinery
Inflation swaps indicate higher prices in next 12 months
US rate futures start to price in rate hike
By Gertrude Chavez-Dreyfuss
NEW YORK, March 20 (Reuters) - U.S. Treasuries declined for a third session on Friday, moving in step with the broader selloff in UK and European government bonds, as escalating Middle East tensions kept oil prices elevated and reinforced inflation worries.
U.S. two-year yields, which move inversely to prices and have been rising for three straight weeks, were on track for their largest three-day rise since April. The yield, the most responsive to interest rate expectations, was last up 8.2 basis points (bps) at 3.913%.
The benchmark 10-year yield also increased, up 10.6 bps at 4.388% US10YT=RR, on pace for its biggest one-day rise since early June 2025.
U.S. crude futures, meanwhile, were up 2% at $98.05 per barrel CLc1.
"There's little sign of de-escalation in Iran, in fact, just the opposite," said Chip Hughey, managing director of fixed income at Truist Wealth in Richmond, Virginia.
"The spike in energy prices is pushing inflation expectations higher, particularly in Europe and this is causing that ripple effect across global bond markets. There is also a growing consensus that some central banks will potentially need to respond to an inflation shock by not only ending their rate cut cycles, but actually pivoting to rate hikes this year."
On Friday, three U.S. officials told Reuters that the United States military is deploying thousands of additional Marines and sailors to the Middle East.
That report came after Iran attacked an oil refinery in Kuwait on Friday and Israel killed a spokesman of Iran's Revolutionary Guards.
U.S. rate futures have started to price in on Friday the prospect of an interest rate hike this year, with a 40% chance of tightening by December, according to LSEG estimates, compared to 0% chance late Thursday.
In other Treasury maturities, the belly of the curve sold off sharply as well. U.S. five-year yields soared 11 bps to 4.028% US5YT=RR, while seven-year yields rose to 4.211%, up 11.7 bps US7YT=RR.
In the UK, government bonds sold off as well. British 10-year government borrowing costs soared to their highest level since the global financial crisis. The 10-year gilt yield GB10YT=RR was last up 17 bps at 5.018%, after earlier hitting 5.022%, the highest since mid-2008.
Germany's 10-year yield DE10YT=RR also hit the highest since 2011 and was last up 8 bps at 3.033%.
"Europe has a larger dependency on imported energy," Truist's Hughey said.
"That makes it more vulnerable to supply shortages caused by the conflict in Iran. Meanwhile, the U.S. is a net exporter of energy, which does provide some insulation from oil supply shortages."
Inflation swaps, a measure of the outlook for future consumer prices, remained elevated on Friday at 3.2% on one-year maturities, after hitting 3.3% USCPIZ1Y= at one point on Wednesday. This reflected expectations that the U.S. consumer price index will average more than 3% over the next 12 months. That's in stark contrast with the latest CPI reading of 2.4% year‑on‑year in February.
(Reporting by Gertrude Chavez-Dreyfuss, editing by Andrei Khalip)
((gertrude.chavez@thomsonreuters.com; 646-301-4124))
