High energy prices exacerbate inflation concerns; U.S. Treasury yields rise again, with the 10-year climbing to 5.25%.

U.S. Treasury prices fell Friday, with yields rising once again. Persistently high energy prices have intensified market concerns over the inflation outlook and reinforced investor expectations that the Federal Reserve will raise interest rates further. After sharp swings earlier in the week, Treasury yields are once again approaching recent highs. On Friday, the two-year Treasury yield, which is most sensitive to changes in Fed monetary policy, rose 4 basis points to 4.79%; the 10-year Treasury yield climbed to 5.25%. Earlier, strong demand at this week's U.S. Treasury auctions had briefly driven bond prices higher and yields lower, but that rally failed to last through the end of the week. Brij Khurana, a portfolio manager at Wellington Management, said the market is digesting an extremely volatile week. With yields still below recent peaks, bond prices tend to stabilize first before choosing a new direction. In recent weeks, long-term global bonds have faced sustained selling pressure. Energy price increases triggered by the Iran war have raised investor concerns that inflation in the United States and other major economies could worsen further, prompting markets to bet on more hawkish monetary policy from central banks. At the same time, widening government fiscal deficits have further undermined investor confidence in long-term bonds. Driven by both inflation and fiscal concerns, the U.S. 30-year Treasury yield climbed earlier this week to its highest level since 2002. However, strong investor demand at Thursday's U.S. 10-year and 30-year Treasury auctions temporarily eased concerns about insufficient demand for long-term bonds, pushing Treasury yields lower. In energy markets, Brent crude oil prices fluctuated around $104 a barrel on Friday. U.S. President Donald Trump said he would delay further military strikes on Iran until after the U.S. midterm elections, and said Russian President Vladimir Putin has agreed to release diesel supplies to global markets. Although the news eased energy supply concerns to some extent, oil prices remain elevated, meaning energy costs could continue to put pressure on inflation and thereby limit the Fed's room to ease monetary policy. Padhraic Garvey, head of Americas research at ING, believes it is still too early to say the Treasury yield rally is over. Garvey said the market currently seems more inclined to look for reasons to sell bonds rather than opportunities to buy them. He noted that no sufficiently convincing signal has emerged to prompt investors to buy Treasuries aggressively and drive yields significantly lower. Next, market focus will shift to the U.S. Consumer Price Index (CPI) report due next Wednesday. This data will provide investors with important clues for judging the path of U.S. inflation and the Fed's subsequent interest rate policy. The Fed implemented its first rate hike since 2023 last month, but markets currently expect only about a 20% probability that the Fed will raise rates again at its October meeting. By contrast, traders have fully priced in a Fed rate hike at the December meeting. Marc Chandler, chief market strategist at Bannockburn, said he is more worried about next week's market moves. If the upcoming CPI data comes in strong, it could further raise market expectations for Fed monetary tightening and drive long-term Treasury yields even higher.