By Joy Wiltermuth
Fed-fund futures were pricing in roughly a coin toss in terms of the odds of a rate hike by March 2027, according to the CME FedWatch Tool
U.S. investors are selling Treasurys, with no relief in sight from higher energy costs due to the Iran war.
Investors were ditching U.S. government debt early Tuesday as higher energy prices from the Iran war pinch Americans' pocketbooks and push up the cost of living.
The yield on the &#34;long&#34; 30-year Treasury bond BX:TMUBMUSD30Y reclaimed the psychologically important 5% level in morning trading after a reading of consumer inflation showed that it reached a three-year annual high of 3.8% in April. Bond prices and yields move in opposite directions.
Higher gas prices, which now average $4.50 a gallon nationally, according to AAA, are the source of much of the immediate pain for U.S. consumers. Diesel prices near record highs also flow through to the cost of groceries, packages and everything else delivered by truck and by rail.
President Donald Trump rebuffed a recent offer from Tehran to end the Iran war, putting the focus on his trip to China this week. With the summer travel season approaching, there doesn't look to be much relief in sight for consumers.
&#34;It all depends on what oil does in the next two to three weeks,&#34; said Tom di Galoma, a fixed-income specialist and managing director at Mischler Financial Group. &#34;The fact that oil continues to push higher, people don't find a really good reason to buy long bonds.&#34;
Global Brent crude (BRN00) climbed above $107 a barrel Tuesday, reflecting a 77% increase in prices in the year so far, according to FactSet.
Inflation tends to weigh on bond values because their fixed payment streams are eroded by a rising cost of living, making them worth less. A rising cost of living also can force central banks to consider interest-rate hikes, which can hurt both stocks SPX and bonds.
Investors on Tuesday also were bracing for new Treasury supply, with the department set to auction $42 billion in 10-year notes BX:TMUBMUSD10Y in the early afternoon and $25 billion in 30-year bonds Wednesday.
The new supply comes as the U.S. federal debt has reached a &#34;staggering but manageable&#34; level of about $30 trillion, more than half of which is set to mature over the next three years, according to a Wells Fargo Investment Institute report on the topic.
The U.S. deficit has been forecast to add another $5 trillion to $6 trillion to the public debt load over the next three years, if it's covered by more Treasury issuance, the Wells Fargo team said.
In the recent past, institutional investors have often come out in force to buy U.S. debt when the 30-year Treasury yield has reached 5%. But the standoff with Iran over the Strait of Hormuz risks deepening what's already been described as a historic oil shock. That could dampen appetite for the longest form of U.S. government debt available on the market.
Related: A 'race against time': Hormuz closure could push Brent crude to $150 a barrel by summer, warns Morgan Stanley
Fed-fund futures were roughly pricing in a coin toss in terms of the chances of a rate hike from the Federal Reserve by March 2027, according to the CME FedWatch Tool.
&#34;While rate hikes are possible,&#34; said Josh Jamner, senior investment strategy analyst at ClearBridge Investments, &#34;de-escalation of the conflict and muted strength in the labor market should keep the Fed on hold for the time being, with cuts still more likely than hikes in 2027 in our view.&#34;
-Joy Wiltermuth
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05-12-26 1144ET

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High inflation is pushing yields on 30-year Treasury bonds to 5%, driven by rising energy costs linked to the Iran war. U.S. consumers face increased living costs, with gas prices averaging $4.50 per gallon. Investors are selling Treasurys amid concerns over inflation and potential interest rate hikes. The U.S. federal debt is projected to reach $30 trillion, with significant new Treasury supply expected. Analysts suggest that while rate hikes are possible, the Federal Reserve may remain on hold due to the current economic climate.

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High inflation is pushing yields to 5% on Treasury bonds