<ul>
<li>Oil prices surge to over $119 a barrel amid supply cuts</li>
<li>Fed funds futures show 67% odds of rate cut in July</li>
<li>Treasury to auction $119 billion in coupon-bearing debt this week</li>
</ul>
By Karen Brettell
NEW YORK, March 9 (Reuters) - U.S. bond yields gained on Monday, driven by worries of rising inflation, as oil prices reached their highest level since mid-2022, prompting traders to push back expectations on when the Federal Reserve will next cut borrowing costs.
Oil prices surged to more than $119 a barrel as some major producers cut supplies and fears of prolonged shipping disruption gripped the market due to the expanding U.S.-Israeli war with Iran.
Tehran named Mojtaba Khamenei to succeed his slain father as supreme leader on Monday, signaling that hardliners were firmly in charge and appearing to close off any path to a swift end to war in the Middle East.
“Oil is driving most of this move,” said Tom di Galoma, managing director at Mischler Financial Group.
Treasuries are also following sharp yield increases and the yield-curve flattening in Europe, di Galoma said, noting reports that hedge funds were being forced to exit losing positions.
The yield on the two-year note (US2YT=RR) rose 4.2 basis points to 3.598%. On benchmark U.S. 10-year notes (US10YT=RR) , it rose 2.6 basis points to 4.158%.
The yield curve between two- and 10-year notes (US2US10=TWEB) flattened by around 2 basis points to 56 basis points.
Both two-year and 10-year yields last week saw their biggest weekly yield increase since last April’s tariff turmoil.
Fed funds futures are now pricing in 67% odds of a rate cut in July and are almost fully pricing in a reduction in September.
A prolonged oil price increase would likely slow the economy, which could then lead traders to price in more rate cuts.
Yields briefly fell on Friday after data showed that the U.S. economy unexpectedly lost jobs in February. Nonfarm payrolls decreased by 92,000 jobs last month, while the unemployment rate rose to 4.4%.
The Treasury will sell $119 billion in coupon-bearing debt this week, including $58 billion in three-year notes on Tuesday, $39 billion in 10-year notes on Wednesday, and $22 billion in 30-year bonds on Thursday.

GOVT

Reuters

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TREASURIES-US yields rise as oil prices hit four-year peak