TREASURIES-US yields edge up on inflation concerns, before 20-year auction

By Karen Brettell

June 16 (Reuters) - U.S. Treasury yields edged higher on Monday on concerns that the conflict in the Middle East will lead to persistently higher oil prices and renewed inflation pressures, while the Treasury Department will also sell $13 billion in 20-year bonds.

Iranian missiles struck Israel's Tel Aviv and the port city of Haifa before dawn on Monday, killing at least eight people and destroying homes, prompting Israel's defence minister to warn that Tehran residents would "pay the price and soon".

The premium of the first-month Brent crude futures LCOc1 contract to that for delivery six months later traded on Monday at a six-month high as investors priced in an increased prospect of disruption to Middle East supply.

“You see a spike in oil prices, which could potentially contribute to inflation data,” said Dan Mulholland, head of rates - trading and sales, at Crews & Associates in New York.

The conflict so far, however, has been relatively contained and has not increased safe-haven demand for U.S. Treasuries.

“It's an isolated thing between Iran and Israel. Obviously, if it escalated beyond that, then it would be a bigger issue,” Mulholland said. “Them going to war isn't solving our country's debt and deficit issue either.”

The Treasury Department’s 20-year bond sale will be another test of demand for longer-dated debt following strong auctions for 10-year notes and 30-year bonds last week.

Longer-dated debt has become less attractive to some investors due to concerns about the longer-term fiscal outlook for the United States, which has pushed their yields higher relative to shorter-dated notes over the past few months.

But the higher yields were also seen as a factor boosting demand for last week’s sales of $39 billion in 10-year notes and $22 billion of 30-year bonds.

TREASURY AUCTION

The Treasury saw soft demand for a $16 billion 20-year bond sale in May, which led to a broader Treasury market selloff that day. The issue has at times struggled to find strong buying interest since its reintroduction in 2020.

The 20-year bond yield US20YT=RR was last up around 1 basis point on the day at 4.944%.

The yield on benchmark U.S. 10-year notes US10YT=RR rose 1 basis point to 4.434% and the 30-year bond US30YT=RR yield rose 1 basis point to 4.925%.

The interest rate-sensitive 2-year note US2YT=RR yield rose 1.1 basis points to 3.969%.

The U.S. government will also sell $23 billion in five-year Treasury Inflation-Protected Securities on Tuesday. Corporate supply may also weigh on the market this week.

Traders are also focused on this week’s Federal Reserve meeting, concluding on Wednesday, when Fed policymakers are expected to keep interest rates on hold and update their economic and interest rate forecasts.

Fed officials have expressed concerns that tariffs will lead to an uptick in inflation and weigh on economic growth, though so far this has not been clearly reflected in the hard economic data.

Investors will be closely watching how many rate cuts Fed officials signal for this year, with many analysts expecting 25 basis points or 50 basis points in reductions by year-end.

Fed funds futures traders are pricing in a 65.5% probability of 50 basis points or more cuts by December, a 27.9% likelihood of one 25 basis point cut and a 6.6% chance that the Fed will leave rates unchanged, according to the CME Group’s FedWatch Tool.

The bond market will be closed on Thursday for the Juneteenth holiday.