Treasuries Gain as Oil Retreat Shores Up Confidence in Warsh Fed

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US Treasuries rose as oil price declines and gains for UK government bonds reinforced improving sentiment after the Federal Reserve’s interest-rate hike and pledge to throttle inflation.
The rally trimmed yields across maturities by at least four basis points, with the two- and five-year retreating from multiyear highs reached Wednesday after the rate hike. While the Fed move was expected, Chairman Kevin Warsh’s rhetoric on inflation drove up market-implied expectations for at least one more increase this year and as many as two more in 2027.
Yields on 10-year Treasuries fell eight basis points to 4.95%, snapping an eight-day rising streak, as traders saw the first hike in three years as restoring the Fed’s inflation-fighting credibility. The move was aided by a further drop in oil prices from their highest levels since mid-May and a rally in UK government bonds that cut long-term yields by 12 basis points.
“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.”
While the quarter-point increase in the Fed’s target range for the short-term federal funds rate to 3.75%-4% was almost fully priced in ahead of the decision, uncertainty remained because Warsh has favored giving limited guidance about the central bank’s next moves.
Ahead of the decision, the outside chance of no rate move was viewed as having the potential to cause a surge in long-term yields as compensation for the risk of future inflation.
The central bank’s favored inflation gauge stood at 3.7% in July and has exceed the Fed’s long-run target of 2% since 2021. Warsh said recent inflation readings don’t suggest “that underlying trends have meaningfully improved.” Fed policymakers’ anonymized quarterly projections for rates and the economy released Wednesday — which Warsh said he didn’t contribute to — had a median of one more hike this year.
Meanwhile, intraday moves in crude oil prices maintained the stranglehold over Treasury yields that’s emerged since late February, when the US attacked Iran, disrupting Middle East exports. This week’s yield highs were reached as oil benchmarks rebounded to levels last seen in mid-May.
“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.”
US benchmark West Texas Intermediate crude futures fell as much as 3.3% Thursday to under $100 a barrel, extending their drop from Tuesday’s high near $107. The futures settled down 0.5% at $101.91.
The drop in oil prices hurt demand for an auction of 10-year Treasury inflation-protected securities, or TIPS. The $19 billion reopening drew 2.653%, about two basis points higher than its yield in pre-auction trading just before 1 p.m., the bidding deadline, a sign that demand fell short of expectations.
While any result higher than 2.438% would have been the highest since 2008, when the financial crisis strained TIPS liquidity, the prospect of Fed rate hikes and lower oil prices dented demand for inflation hedges.
‘Long Shadow’
Still, some analysts warned of further weakness in Treasuries. BNP Paribas SA head of US rates strategy Guneet Dhingra recommended shorting the 30-year, arguing that investors doubt that the Fed will take rates back into restrictive territory.
“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 recent bond selloff extends beyond Treasuries. The average yield on global government bonds climbed to a 19-year high this week.
The rally in UK government bonds came after the Bank of England scrapped plans to sell long-dated gilts as part of its quantitative tightening program. The decision provided some relief for the battered market, where 10- and 30-year yields had reached the highest levels since 2007 and 1998 respectively.
The UK 30-year yield declined as much as 13 basis points to 5.73%, extending its retreat from 5.95%, the multiyear high reached Sept. 15. The gilt rally underpinned European bond markets, which erased earlier declines. Germany’s 10-year yield fell three basis points to 3.48%.
The Bank of England left its policy rate unchanged Thursday while warning that a hike may be needed if inflation pressures intensify as a result of conflict in the Middle East.
The Bank of Japan started a two-day policy meeting, with all respondents in a survey by Bloomberg expecting it to result in a policy rate increase to 1.25% from 1%.
With assistance from Winnie Hsu, Eijiro Ueno, Elizabeth Stanton and Ezra Fieser.
©2026 Bloomberg L.P.
This article was generated from an automated news agency feed without modifications to text.
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