US Treasury yields rise after Trump comments raise concerns of Iran escalation

[NEW YORK] US Treasury yields rose on Thursday (Nov 12) after US President Donald Trump said the US does not need a deal with Iran and as traders weighed the chance of a larger-than-usual Federal Reserve rate hike next month.

Since US-Israeli attacks began the war with Iran at the end of February, disrupting world energy markets, oil and gas prices have risen and added to concerns about inflation, which has run above the Fed’s 2 per cent target for almost six years.

“We don’t need a deal with Iran. Those days have long since passed. We’ve got their money, hundreds of billions of dollars, and we’ve got their strait!” Trump wrote on social media, referring to the Strait of Hormuz.

He also said that he wanted US Vice-President JD Vance to focus “his complete and total attention” on crime and corruption in Democratic-run US cities, saying that could save more money than a deal with Iran.

“Basically, he feels like this ceasefire deal isn’t likely,” said Tom di Galoma, managing director at Mischler Financial Group. “What portfolio managers are thinking is that the US is preparing for further attacks this weekend.”

The two-year note yield, which typically moves in step with Fed interest rate expectations, rose 10.79 basis points to 4.835 per cent, the highest since Oct 14.

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The yield on benchmark US 10-year notes rose 6.53 basis points to 5.054 per cent, the highest since Oct 22. The closely watched yield curve between two-year and 10-year notes reached 21 basis points, the flattest level since Sep 24.

Larger-than-usual rate hike?

Traders are assessing the likelihood of a 50-basis-point hike in December, which would be larger than the usual 25-basis-point moves.

On Tuesday, Fed governor Christopher Waller said the central bank should raise short-term borrowing costs in December even if data shows inflation cooled last month. He added that it should consider a half-point increase if the inflation picture worsens.

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He made the comments just before data showed consumer prices rose more than economists expected in October. Producer price data for October is due on Friday.

Cleveland Fed president Beth Hammack on Thursday said she still believes higher short-term rates are required to lower inflation, but that increases could be gradual.

“My view is that if we go steadily in smaller increments, more frequent, smaller rises, it’s easier for businesses and households to manage around that,” she said.

Fed funds futures traders are pricing in 27 basis points of hikes in December, indicating slim odds of a 50-basis-point increase.

The Treasury will sell US$25 billion in 30-year bonds on Thursday, the final sale of US$125 billion in coupon-bearing debt this week.

There was mixed demand for a US$58 billion sale of 3-year notes on Monday and average demand for a US$42 billion auction of 10-year notes on Tuesday. REUTERS