US Military Strikes Persian Gulf Again, US Treasury Yields Pick Up

Bloomberg reported on May 28th that following a U.S. military airstrike on a military target in the Persian Gulf and multiple targets near the Strait of Hormuz, market concerns about accelerating inflation have surged rapidly. During the Asian trading session, the yield on the 10-year U.S. Treasury note rose by 5 basis points to 4.53%, and the 2-year yield increased by 4 basis points to 4.08%, ending the previous five consecutive trading days of declines. The Bloomberg Dollar Spot Index also rose by 0.3% in tandem.

In the days prior, the market had bolstered U.S. Treasury bonds on the optimistic expectation that the U.S. and Iran might reach an agreement. This airstrike shattered that expectation, raising the risk of prolonged oil supply disruptions.

Since the end of February this year, persistently climbing inflation expectations have become the main driver for rising bond yields. The market currently anticipates that several central banks, including the Federal Reserve, will have to respond with interest rate hikes. If negotiations remain in stalemate, the combined effect of high oil prices and inflationary pressures will further compress the policy space for central banks.