Oil Price Rally Sparks Concerns over Inflation, Pushes Treasury Yields Higher

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Treasury yields have risen due to concerns that an increase in oil prices could keep inflation high, and that the Federal Reserve may be pressured to raise interest rates further. This comes after OPEC+ announced an oil production cut over the weekend, which led to a jump in crude prices. Some top oil analysts have even predicted $100 crude, which would be a significant reversal for markets. WTI and Brent crude jumped as much as 8% on Monday to above $80 per barrel.

This rise in oil prices has reignited concerns about inflation, causing traders to price in a higher terminal rate for the Fed. Money-market traders have also increased their bets on the peak for US interest rates, with swaps pricing in a 64% chance that the Fed will raise rates again at its May policy meeting, up from 56% on Friday. As a result, the Bloomberg Dollar Spot Index gained 0.4%. Geoffrey Yu, a senior foreign-exchange strategist at Bank of New York Mellon, believes that higher oil prices will likely support the dollar and commodity-related currencies.

The move by OPEC+ is expected to cause some of the expectations for a slowdown in inflation to be “faded away”, according to Hidehiro Joke, a senior bond strategist at Mizuho Securities in Tokyo. He also stated that since inflation is likely to remain the biggest driver of the Fed’s monetary policy, the market will be less likely to assume an early shift to lower rates or a faster pace of rate cuts. Furthermore, Commerzbank suggests that the US dollar may also benefit from being a net exporter of energy.

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