(Updated in New York morning time)
* Oil prices gained more than 2% on fresh US-Iran attacks
and Houthi blockade threats
* The 2-year Treasury yield rose 3.38 basis points to 4.249%
* Fed funds futures show 86% probability of a rate hike by
year-end
By Karen Brettell
NEW YORK, July 20 (Reuters) - Benchmark 10-year U.S.
Treasury yields reached a two-month high on Tuesday as rising
tensions in the Iran conflict dominated trading, with no major
economic data on the calendar this week to otherwise steer
market direction.
Oil prices gained more than 2% on Tuesday on fresh attacks
exchanged by the U.S. and Iran as well as threats of a naval
blockade of Saudi Arabia by Yemen's Houthis.
Traders are now weighing whether the renewed spike in oil
prices will feed through to consumer prices and raise the odds
of further Federal Reserve interest rate hikes.
Energy prices are now higher than they were at the June Fed
meeting, when the majority of the committee was projecting rate
hikes, said Michael Lorizio, head of U.S. rates and mortgage
trading at Manulife Investment Management.
"With the repricing that we've seen in oil and gas and the
dovish shift that we saw after the last Fed meeting, we have to
maybe revisit some of the thinking that was in place before the
de-escalation in Iran," Lorizio said.
Inflation expectations had fallen after the U.S. and Iran
reached a ceasefire deal in mid-June, and eased further after
data last week showed consumer price inflation moderated more
than expected in June. Those expectations are now climbing off
their lows as the conflict intensifies once again.
The 2-year note yield, which typically moves in
step with Fed interest rate expectations, rose 3.38 basis points
to 4.249%.
The yield on benchmark U.S. 10-year notes rose
3.62 basis points to 4.634% and reached 4.640%, the highest
since May 20.
The yield curve between 2- and 10-year notes
was at 38.2 basis points.
The Fed held interest rates steady at its June 16-17 meeting,
but policymakers signaled they expect to raise borrowing costs
later this year amid growing concern that inflation remains
lodged above the central bank's 2% target.
The U.S. central bank is expected to hold rates steady again
when it wraps up its two-day meeting on July 29, though traders
continue to bet on a hike later in the year. Fed funds futures
currently show 67% odds of a rate increase by September and an
86% probability of one by year-end.
Meanwhile, President Donald Trump unveiled 50% tariffs on a wide
range of imports from Canada on Monday in response to what the
U.S. administration called its discriminatory treatment of
American-made cars, alcohol and dairy goods, threatening a new
front in a global trade war.
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.