TREASURIES-Yields rise as Iran war uncertainty keeps energy prices high

By Matt Tracy

WASHINGTON, March 27 - U.S. Treasury yields rose on Friday as uncertainty persisted around the Iran war and elevated energy prices.

The yield on benchmark 10-year Treasury notes US10YT=RR ticked up and was last up 2.8 basis points at 4.444%. Yields had earlier reached as high as 4.482%, their highest since July.

Yields on 30-year Treasury bonds US30YT=RR also rose on Friday and at one point were just shy of 5%. They were last up 4.9 bps at 4.985%.

The selloff in Treasuries comes as energy prices remained elevated despite U.S. President Donald Trump on Thursday extending a pause on energy infrastructure strikes against Iran.

The Strait of Hormuz, through which a fifth of global energy supply flows, has remained closed throughout the war. Options markets have bet that Brent crude will reach an all-time high of over $150 per barrel by the end of April.

Elevated oil prices have raised concerns of persistent inflation, with U.S. rate futures beginning to price in the possibility of an interest-rate hike from the Federal Reserve later this year.

Markets last priced in a 95.9% chance of no hike at the Fed's April meeting and a 22.6% chance of a 25 bp hike by the end of the year.

Two-year U.S. Treasury yields US2YT=RR, a key indicator of Federal Reserve interest-rate expectations, were last down 6.6 basis points at 3.918%. They earlier climbed to 4.027%, their highest since June.

"The lingering threat of inflation is what is on investors' minds," said Sean Simko, head of fixed-income portfolio management at SEI Investments.

"The longer the Iran conflict continues and carries on, the higher the probability of increased inflation and the expectation for higher yields," he said.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=RR, seen as an indicator of economic expectations, was last at 52.4 basis points.