Rising energy prices intensify inflation concerns; US Treasury yields increase again, with the 10-year rising to 5.25%.

According to the Zhihu Finance APP, U.S. Treasury prices fell on Friday, with yields rising once again. Persistently high energy prices have heightened market concerns about the inflation outlook and reinforced investor expectations of further rate hikes by the Federal Reserve. After sharp fluctuations earlier in the week, Treasury yields are again approaching recent highs.

On Friday, the two-year U.S. Treasury yield, which is most sensitive to changes in Federal Reserve policy, rose 4 basis points to 4.79%, while the 10-year Treasury yield climbed to 5.25%. Earlier this week, strong demand at U.S. Treasury auctions temporarily drove bond prices higher and yields lower, but this momentum failed to carry through to the weekend.

Brij Khurana, portfolio manager at Wellington Management, commented that the market is digesting an extremely volatile week. With yields still below their recent peaks, bond prices often first stabilize before making a new directional move.

In recent weeks, global long-term bonds have faced persistent selling pressure. The rise in energy prices triggered by the Iran war has raised investor concerns that inflation in the U.S. and other major economies could intensify further, prompting markets to bet on a more hawkish approach from central banks. Meanwhile, widening government fiscal deficits have further eroded investor confidence in long-term bonds. Driven by both inflation and fiscal worries, the U.S. 30-year Treasury yield earlier this week briefly climbed to its highest level since 2002.

However, on Thursday, strong investor demand at U.S. 10-year and 30-year Treasury auctions temporarily eased market concerns over insufficient demand for long-term bonds, pushing Treasury yields lower.

In the energy markets, Brent crude prices fluctuated around $104 per barrel on Friday. President Trump stated he would delay additional military action against Iran until after the U.S. midterm elections, and said that President Putin of Russia has agreed to release diesel supplies to the global market.

Although these developments have somewhat eased supply concerns, oil prices remain elevated, meaning energy costs will likely continue to put upward pressure on inflation and limit the Federal Reserve's room for monetary policy easing.

Padhraic Garvey, Head of Americas Research at ING, believes it is still too early to declare the rally in Treasury yields is over. Garvey noted that the market currently seems more inclined to seek reasons to sell bonds rather than opportunities to buy. He pointed out that there have not yet been strong enough signals to prompt investors to aggressively buy Treasuries and drive yields significantly lower.

Looking ahead, the market's focus will shift to next Wednesday’s release of the U.S. Consumer Price Index (CPI) report. This data will provide investors with important clues for assessing U.S. inflation trends and the Federal Reserve’s subsequent rate policy.

Last month, the Federal Reserve implemented its first rate hike since 2023, but currently the market only sees about a 20% chance of another hike at the October meeting. In contrast, traders have fully priced in expectations for a rate hike at the December meeting.

Marc Chandler, chief market strategist at Bannockburn, said he is more concerned about market moves next week. If the upcoming CPI data comes in strong, it could further bolster expectations for tighter monetary policy from the Federal Reserve and drive long-term Treasury yields even higher.