TREASURIES-US bonds tumble as oil price surge kindles inflation fears

(Updates prices)

SINGAPORE, March 5 (Reuters) - A steep selloff in U.S. Treasuries continued for a fourth day on Thursday, as investors fretted that surging energy prices from the war in the Middle East could stoke inflation and derail the Federal Reserve's rate outlook.

The benchmark 10-year U.S. Treasury yield jumped as much as 5 basis points (bps) in Asia to a three-week high of 4.1310%. It was last up 3 bpsfor the day and was on track for its biggest weekly rise since April 2025 at 15 bps.

The two-year yield was meanwhile up about 2 bps to 3.566%, having risen more than 18 bps this week. Bond prices move inversely to yields.

Investors have pared back expectations of further easing from the Fed this year on the back of the U.S.-Israel war with Iran, which entered its sixth day as Iran launched a wave of missiles at Israel, sending millions of residents into bomb shelters.

That has kept oil prices elevated, and with shipping through the key Strait of Hormuz paralysed, investor focus has quickly shifted to the risk of a resurgence in inflation.

Benchmark U.S. oil prices rose to $78.09 a barrel on Thursday, the highest since June, and were last up 2.3% at $76.33 a barrel.

"As of right now, the (U.S.) consumer price index is going to get back to the high (2%) if crude oil costs don't tumble in short order," said Jose Torres, senior economist at Interactive Brokers.

"The reversal in (inflation) progress would likely send Treasuries and stocks further lower, as rate-cut optimism amid decelerating cost pressures was what sparked the rallies in fixed income and cyclical benchmarks early in 2026."

Traders are now pricing in a roughly 30% chance of a Fed cut in June, compared to more than 40% a week ago, according to the CME FedWatch tool.

Fed funds futures point to just over 40 bps worth of easing by the year-end.

The shifting Fed expectations have also come on the back of Wednesday's upbeat U.S. economic data, which showed services sector activity surged to more than a 3-1/2-year high in February amid strong demand. (Reporting by Rae Wee in Singaore; Additional reporting by Harry Robertson in London; Editing by Jamie Freed and Bernadette Baum)