US Treasuries rally as oil cools and confidence in Fed’s Warsh grows

US Treasuries rallied on Thursday as a retreat in oil prices and a sharp rebound in UK government bonds helped ease pressure on global debt markets after the Federal Reserve raised interest rates and signalled that more tightening could follow, according to a Bloomberg report.

Yields across maturities fell by at least five basis points, with the two-year and five-year yields pulling back from multiyear highs reached after Wednesday’s Fed decision. The 10-year Treasury yield dropped eight basis points to 4.95%, snapping an eight-day run of increases.

Fed hike restores confidence in inflation fight

The Fed raised its benchmark interest-rate range by 25 basis points to 3.75%-4%, a move that had been largely priced in by markets. The bigger focus was on Fed Chair Kevin Warsh’s stance on inflation, which pushed traders to price in at least one more rate increase this year and as many as two in 2027.


“The Fed seemed credible in terms of fighting the inflation tail risk — that’s a positive for bond investors,” said Michael Chang, an analyst at Citi. “That’s reflected in long-term inflation expectations coming off yesterday and today.”

The Fed’s preferred inflation gauge stood at 3.7% in July, close to its highest level since 2023 and well above the central bank’s 2% long-term target. Warsh said recent summer inflation readings did not indicate a meaningful improvement in underlying price pressures.

The Fed’s latest projections showed a median expectation for one more rate hike this year, although Warsh said he did not contribute to those projections.

The rate increase also appeared to strengthen investor confidence that the central bank is willing to keep fighting inflation, helping pull longer-term Treasury yields lower.

Oil remains key driver for bond yields

Oil prices provided another boost to Treasuries on Thursday. US benchmark West Texas Intermediate crude futures fell as much as 3.3% to below $100 a barrel, extending a decline from Tuesday’s high near $107.

Oil has become a major driver of Treasury yields since late February, when the US attacked Iran and disrupted Middle East exports. Higher crude prices have fuelled concerns that inflation could remain elevated, adding pressure on interest rates and government bonds.

“Most of the moves we’re getting in 30-year yields are a function of oil,” said Blake Gwinn, head of US rates strategy at RBC Capital Markets. “The correlation has become self-reinforcing.”

The decline in oil prices also weighed on demand for a $19 billion reopening of 10-year Treasury inflation-protected securities. The auction cleared at a 2.653% yield, around two basis points above its pre-auction level, suggesting demand was weaker than expected.

Still, analysts warned that the pressure on bonds may not be over. “For the bond market, this is likely to cast a long shadow rather than create a short-lived storm,” said Hebe Chen, a market analyst at Vantage Global Prime. “The front end now has to price the possibility of further Fed tightening, while the long end is already wrestling with inflation, heavy issuance and fiscal concerns.”

The bond rally extended beyond the US. UK 30-year gilt yields fell as much as 13 basis points to 5.73% after the Bank of England scrapped plans to sell long-dated gilts under its quantitative tightening programme. Germany’s 10-year yield also fell three basis points to 3.48%.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)