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TREASURIES-Yields rise as Iran attacks on Gulf oil supply raise inflation fears

BY Reuters | TREASURY | 10:20 AM EDT

* Iran attacks on energy supplies raise inflation concerns

* Fed funds futures traders reduce rate cut expectations

* Treasuries show little reaction to jobless claims data

By Karen Brettell U.S. Treasury yields rose on Thursday as Iran ramped up attacks on energy and transport facilities in the Gulf, further driving oil prices up and stoking concerns about resurgent inflation that could prompt the Federal Reserve to keep interest rates higher for longer.

Two fuel tankers were ablaze in an Iraqi port on Thursday after a hit by suspected Iranian explosive-laden boats on Wednesday, a step-up in attacks that have cut off oil from the Middle East. "The inflationary and fiscal consequences of an extended war have left us wary of further weakness in Treasuries with no clear off-ramp to the conflict in sight," interest rate strategists at BMO Capital Markets said in a report. Fed funds futures traders are pricing in 30 basis points of cuts by year-end, down from around 50 basis points a few weeks ago, indicating dwindling hopes the Fed will make a second 25-basis-point cut this year.

The two-year note yield, which typically moves in step with Fed interest rate expectations, rose 4.4 basis points to 3.68% and earlier reached 3.69%, the highest since August 26.

The yield on benchmark U.S. 10-year notes rose 4.1 basis points to 4.247% and reached 4.251%, the highest since February 5.

The yield curve between two- and 10-year notes was last at 56 basis points. Treasuries showed little reaction to data on Thursday showing that the number of Americans filing new applications for jobless benefits fell last week.

The Treasury will sell $22 billion in 30-year bonds on Thursday, the final sale of $119 billion in coupon-bearing supply this week. The government saw soft demand for a $58 billion auction of three-year notes on Tuesday, and a $39 billion sale of 10-year notes on Wednesday.

(Reporting by Karen Brettell; Editing by Emelia Sithole-Matarise)

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In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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