TREASURIES-Yields rise as Iran tensions cloud inflation outlook

Brent briefly hit a nearly six-week high before easing on Iran-U.S. negotiation comments

This week's supply includes $13 billion in 20-year bonds and $21 billion in TIPS

Fed funds futures imply 62% odds of a September rate increase

By Karen Brettell

NEW YORK, July 20 (Reuters) - U.S. Treasury yields rose on Monday as traders weighed whether escalating oil prices, driven by the widening war with Iran, would eventually feed through to consumer prices, even as data showed inflation pressures easing last month.

Brent crude futures reached an almost six-week high on Monday before pulling back from their peak after Iran's foreign ministry said negotiations with the U.S. could be pursued based on national interests.

Iran's Revolutionary Guards said on Monday they had struck U.S. military assets across the Middle East after another night of U.S. bombardment of Iranian cities, part of a cycle of attacks that has all but wrecked an interim ceasefire agreement.

“Oil has to push oil higher… this is not something that's just going to be done overnight,” said Tom di Galoma, managing director of global rates trading at Mischler Financial Group.

The 2-year note US2YT=RR yield, which typically moves in step with Fed interest rate expectations, rose 2.37 basis points to 4.196%.

The yield on benchmark U.S. 10-year notes US10YT=RR rose 2.25 basis points to 4.564%.

The yield curve between 2- and 10-year notes US2US10=TWEB was at 36.6 basis points.

Data last week showed that U.S. consumer inflation slowed more than expected in June as energy prices retreated.

Still, traders continue to price in the possibility of a rate move this year, with fed funds futures reflecting 62% odds of a rate increase by September.

The headline consumer price index increased by 3.5% in the 12 months through June after surging 4.2% in May. Core inflation rose 2.6% on the year, following a 2.9% increase the previous month.

Iran is likely to dominate trading sentiment with a light economic calendar this week and Federal Reserve officials in a blackout period ahead of the Fed’s July 28-29 meeting, when policymakers are expected to leave rates unchanged.

The Treasury Department will sell $13 billion in 20-year bonds on Wednesday and $21 billion in 10-year Treasury Inflation-Protected Securities on Thursday.


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