Rising oil prices put pressure on the market to lower interest rate expectations, while U.S. bond yields continue to rise.

Due to market expectations of rising oil prices prompting cautiousness among Federal Reserve policymakers about further interest rate cuts at this week's meeting, US Treasury prices fell in response. On Monday, US Treasury prices briefly narrowed their declines, while oil prices also fell. Earlier reports stated that Iran expressed a desire to end the conflict with Israel. Nevertheless, yields on various maturity US bonds rose by 2 to 6 basis points. Oil prices remain significantly higher than the levels before the Israeli attacks last weekend, raising concerns about sustained inflation risks. Yields on US 2-year Treasury notes rose slightly by about 2 basis points to 3.97% as traders reduced bets on Fed policy easing. It is expected that there will be a cut of about 45 basis points by the end of the year, down from the 49 basis points anticipated last Friday. The bond market is eagerly awaiting the start of the two-day Federal Reserve meeting scheduled for Tuesday. While most expect officials to keep interest rates unchanged, the market is still waiting for the quarterly economic and interest rate forecasts report - the so-called "dot plot". In March, Fed officials indicated two rate cuts for this year. Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree, stated, "The biggest risk to predicting the outcome of the Fed meeting is the potential shift from the expected two cuts to one cut, as the outcome can change if just one or two members alter this expectation." Following the auction of 20-year US Treasury bonds, the performance of long-term bonds still lags behind the market, though the determined yield levels from this auction align with expectations. This is a significant improvement compared to last month when the issuance for this maturity of bonds fell below expectations, triggering widespread selling. With the end of the Fed meeting on Wednesday and the US holiday starting on Thursday, this $130 billion auction was held two days ahead of the usual schedule. Since the tension between Israel and Iran escalated into direct conflict over the weekend, US Treasury prices have been falling - a trend that may have lasting effects based on past conflict events. Data shows that direct attacks by Iran in April 2024 and renewed conflicts between the two countries in October led to a rapid increase in US Treasury yields, which remained high for the following 30 days. After the initial spike in oil prices due to the conflict between Israel and Iran over the weekend, prices eventually fell. On Monday, WTI crude oil prices fell by as much as 4.9% before ending down by about 2.3%. Ed Al-Hussainy, rate strategist at Columbia Threadneedle Investment, highlighted the concerning issue of market volatility. Al-Hussainy stated, "The mechanism at play is that this shock sentiment leads to an increase in implied volatility, which has triggered a decline in demand for both risk and rate assets." These situations have heightened concerns among US Treasury investors, who worry that Trump's policies may trigger inflation and widen the US budget deficit, prompting traders to demand higher premiums for long-term bonds. The highly anticipated 30-year US bond auction last week saw strong demand exceeding expectations, while the auction for 20-year US bonds was uneventful. The yield of 4.942% matched expectations, with non-dealers receiving 86.6% of the allotment, slightly higher than recent sales. Wei Liang Chang, Macro Strategist at DBS Bank in Singapore, stated, "Pressure on the US Treasury yield curve may increase further. With the geopolitical environment becoming more uncertain, investors may consider increasing military spending in the coming period. Additionally, if oil prices continue to remain high, the risk of continued inflation escalation will also increase." Cameron Crise, Macro Strategist at Bloomberg, added, "The auction alleviates a potential risk for holding longer-dated assets, but it is unclear if this will lead to a significant rally in the market before the Fed announces its policy later this week."