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(Bloomberg) -- Treasuries rose after swinging sharply with oil prices after Iran disputed statements by US President Trump regarding talks to end hostilities.

The advance halted a selloff that had lifted US government bond yields to their highest levels in months earlier Monday. Following the market’s worst day in nearly a year, the two-year note’s yield had risen as much as 11 basis points to exceed 4% for the first time since June, a move driven by rising oil prices as the Iran war has disrupted supply from the region via the Strait of Hormuz.

The oil crisis has driven up inflation expectations, leading traders to abandon wagers on Federal Reserve interest-rate cuts this year. As the US benchmark crude contract tumbled as much as 14% Monday after Trump’s comments, those wagers were partially restored, and Fed-sensitive Treasury two-year yields retreated to 3.80%, cementing their biggest single-day range since August. They were back around 3.84% as of 9:50 a.m. in New York.

“Markets are likely to stay nervous and volatile as they await further confirmation on progress towards an end to the war or lasting ceasefire that would reopen the Strait of Hormuz,” said Jens Naervig Pedersen, a senior analyst at Danske Bank.

The sharp reversal to session lows by oil and Treasury yields began shortly after 7 a.m. in New York when Trump said on social media that he’d instructed US forces to postpone attacks on Iranian energy infrastructure after productive talks with Tehran. Oil prices and yields subsequently pared their declines after Iran’s semi-official Fars news agency denied there were talks. 

“Higher oil prices are an issue for the administration,” said Gregory Faranello, head of US rates at Amerivet Securities. “US Treasuries have been tracking oil prices and this is what we’re seeing this morning.”

Monday’s yield shifts were guided by traders lightening bets on monetary tightening by the Fed this year and resuming pricing in some easing. Before Trump’s comments, money markets had almost fully priced a quarter-point hike.

Expectations for Fed rate cuts this year collapsed last week, and were replaced by wagers on a rate increase, as US military action against Iran drove inflation-stoking energy price gains. 

As measured by the Bloomberg Treasury index, the US government bond market lost 0.7% Friday, its biggest one-day loss since April 7, when fallout from the Trump administration’s April 2 tariffs announcement hit long-maturity tenors. Its 2.3% loss over the past three weeks was last exceeded in October 2024 as US economic performance cast doubt on the outlook for Fed rate cuts, while the prospect of wider deficits requiring increased bond supply helped drive longer-term yields higher.

--With assistance from Edward Bolingbroke.

(Adds comments and updates yield levels.)

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