Treasuries Pull Back Sharply As Middle East Conflict Renews Inflation Concerns

(RTTNews) - After moving sharply higher over the two previous sessions, treasuries showed a substantial move to the downside during trading on Monday.

Bond prices saw a significant pullback in morning trading and remained firmly negative throughout the afternoon. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, surged 8.6 basis points to 4.048 percent.

With the increase, the ten-year yield rebounded after closing below 4 percent for the first time in three months and hitting a four-month closing low last Friday.

The sharp pullback by treasuries came after the U.S. and Israel launched joint strikes against Iran over the weekend, killing Iranian Supreme Leader Ayatollah Ali Khamenei.

Iran retaliated by launching waves of drones and missiles on countries across the Middle East, including Kuwait, the United Arab Emirates, Bahrain, Saudi Arabia, Oman, and Qatar.

The conflict in the region escalated further today after Israel launched airstrikes on Hezbollah targets in Beirut and other parts of Lebanon following projectile fire from Lebanese territory into northern Israel.

In remarks at the White House, President Donald Trump said the conflict with Iran is expected to last four to five weeks but said the U.S. has the "capability to go far longer than that."

While treasuries are often seen as a safe haven, the conflict has led to a spike in crude oil prices that has renewed concerns about inflation and the Federal Reserve leaving interest rates higher for longer.

"Scenes in the Middle East have caused widespread nervousness across financial markets," said Dan Coatsworth, head of markets at AJ Bell. "The U.S. attacks on Iran have caused oil prices to soar amid fears of disruptions to supplies, pushing up costs for businesses and consumers."

He added, "If the issues persist then the market will start to worry about new inflationary pressures and that could lower expectations for near-term interest rate cuts."

In U.S. economic news, the Institute for Supply Management released a report showing a slight slowdown in the pace of growth in U.S. manufacturing activity in the month of February.

The ISM said its manufacturing PMI edged down to 52.4 in February after surging to 52.6 in January, but a reading above 50 still indicates growth. Economists had expected the index to dip to 51.8.

Amid a quiet day on the U.S. economic front, trading on Tuesday may be impacted by reaction to the latest developments in the Middle East.