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The selloff in government bonds came as benchmark oil prices jumped more than 5% to their highest level since May, reviving concerns that higher energy costs could feed through into broader inflation. That prospect has made investors less confident that the Fed can afford to ease policy, with traders raising the probability of a rate increase as soon as next week to about 70%. The shift in expectations was visible across the Treasury curve. The 10-year yield rose as much as nine basis points to 4.93%, its highest level since November 2023, while the two-year yield moved above 4.5% for the first time since 2024. The 30-year yield reached a level last seen in 2007. “Crude oil drives inflation, and if it starts getting into the system it’s going to be hard to contain it,” Tony Farren, managing director in rates sales and trading at Mischler Financial Group, was quoted as saying by Bloomberg. “There’s no reprieve for yields to go lower if inflation remains elevated.” Oil drives the move The latest move in yields came just a day before the release of US consumer price data, which investors are watching closely for clues about the Fed’s next move. A producer-price report released Thursday showed increases broadly in line with economists’ expectations, but the renewed rise in oil has complicated the inflation outlook. Bloomberg strategist Brendan Fagan said the producer-price data had strengthened the case for tighter policy, while noting that the latest jump in oil prices was also an important factor behind the move in rates. “PPI data has only reinforced the case for tighter policy and, at the margin, gives the rise in yields a firmer fundamental footing. That said, some of it can be caveated by yet another sharp rise in oil. Either way, rates are repricing higher in what can only be classified as a global phenomenon," Fagan said. The pressure was not confined to the US. UK two-year yields jumped 17 basis points, while euro-zone bonds also weakened after the European Central Bank raised its benchmark rate by a quarter point to 2.5%. The ECB said inflation was likely to remain “well above target for an extended period,” according to Bloomberg. Supply adds pressure Oil is not the only force weighing on the bond market. Investors are also confronting a growing supply of government and corporate debt, as governments finance deficits and companies raise funds for capital spending. The Treasury selloff pushed the expected yield on a $22 billion reopening of a 30-year bond to about 5.35%, a level higher than the results of any 30-year Treasury auction going back to 2001. At the same time, the Treasury Department was due to buy back as much as $6 billion of debt in the 10- to 20-year sector, increasing the targeted amount from $2 billion. The buybacks are intended to improve market functioning and help contain pressure on longer-dated yields. Bank of America expects net Treasury supply to rise to about $2.3 trillion in 2028 from $1.9 trillion this year. Rising interest costs are adding to the fiscal burden, with annual US government interest expense having doubled over the past five years to more than $1.2 trillion. The prospect of a prolonged Middle East war has further unsettled investors about US spending. A pledge by President Donald Trump to give adult US citizens a $5,000 dividend if Republicans retain control of Congress was also viewed as a potential risk to the fiscal outlook, even though the proposal is considered unlikely to be implemented. Meanwhile, corporate borrowing remains strong. Investment-grade bond sales have set records in four of the past eight months, including the past three, with issuance running 7.6% above 2020 levels. A seasonal surge expected to reach $70 billion this week had already reached $61 billion by Wednesday, adding another source of supply to markets already struggling with higher yields. (Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times) (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2025, Share Market on Budget 2025 and expert advice, on ETMarkets. 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