- Missile and drone attacks have hit several oil tankers, causing supply concerns.
- The US is piling economic pressure on Iran by isolating the country.
- Traders are now expecting the CPI report.
Interest futures collapsed on Friday as yields soared with oil prices amid escalating geopolitical tensions. The war between the US and Iran continued to send fuel prices higher, especially since there is no end in sight. At the same time, the US Treasury Department announced a smaller-than-expected bond buyback on Wednesday, which weighed on interest rate futures.
US 10-year yield (Source: Bloomberg)
Treasury yields have jumped this week as Trump’s comments indicated that the US would not back down from attacking Iran. Moreover, the US president said he has no regret over starting the war. Some experts believe it will impact the upcoming midterm election. However, according to Trump, it was more important to keep Iran from getting a nuclear weapon.
The missile and drone attacks in the last week have hit several oil tankers, causing supply concerns. At the same time, Iran has hit US bases in Jordan, retaliating every time they strike. At the moment, neither country appears ready to back down, which could lead to a prolonged war. Some believe it could extend beyond Trump’s presidency.
Furthermore, the US is piling economic pressure on Iran by isolating the country. Treasury Secretary Scott Bessent announced that the US would be sanctioning a major bank on Monday. Most banks that have been supporting Iran financially have been sanctioned. Still, Tehran is not ready to surrender.
Supply disruptions will mean a tighter market and higher prices. As oil rises, inflation worries increase, and central banks are forced to hike interest rates. Consequently, Treasury yields climb and interest futures collapse.
Initially, a bond buyback plan for September had given investors some hope. However, the Treasury Department announced a $6 billion buyback, which experts say was underwhelming for Wall Street investors. Some had expected $8 billion.
“Treasury announced buybacks less than hoped for (or feared depending on your point of view),” according to Mizuho Securities. Bessent is “facing an uphill battle in terms of trying to move against the general momentum of the market that is adjusting based on the fundamental backdrop.”
Elsewhere, US employment data last week revealed a robust labor market, giving the Fed room to hike interest rates. Traders are now expecting the CPI report that will further shape the outlook for Fed policy.
