Oil prices boost 30-year U.S. Treasury yield above 5%, U.S. Treasury raises quarterly bond issuance forecast; a major U.S. Treasury event is coming on Wednesday.

``` Iran Attacks UAE Energy Facilities, Oil Prices Rekindle Inflation Fears, US Treasuries Undergo Broad Selloff—30-Year Yield Breaks 5% on Monday, Fed Rate Hike Bets Surge; Wednesday's Quarterly Refinancing Announcement to Add More Uncertainty to the Bond Market Storm On Monday, US Treasuries fell across the board, with yields on different maturities rising at least 5 basis points. The 30-year yield hit as high as 5.03%, the highest since July 2025, just 8 basis points from an 18-year high. The 2-year yield, the most sensitive to monetary policy expectations, rose as much as 11 basis points in one day, reaching 3.99%. The immediate trigger for this wave of selling was renewed tensions in the Middle East. Iran Attacks UAE, Oil Prices Return to $105 Oil prices experienced extreme volatility on Monday. - Before the market opened, Trump announced the "Freedom Plan" to open the Strait of Hormuz, driving oil prices lower; - In early trading, Iran claimed to hit a US Navy vessel, causing oil to jump; after US CENTCOM denied this, prices dropped back; - At 11:00 AM ET, Iran reportedly attacked Dubai and UAE oil & gas infrastructure, as well as several cargo ships, sparking a sharp oil surge; - At 12:30, the UAE called the attack a “dangerous escalation” and reserved the right to retaliate, sending prices higher; - At 2:20, the UAE announced all schools nationwide would switch to remote teaching, again accelerating oil’s rise. Ultimately, WTI crude returned above $105, while forward Brent crude (Dec 2026 contract) hit new highs since the Iran War. The average US retail gasoline price also reached its highest point since the Iran War and is likely to surpass $4.50 per gallon. Goldman Sachs analyst Chris Hussey pointed out that this round of oil price shock differs from the past: the economy is recovering, corporate earnings are improving, and investor sentiment is also picking up, but prices are still rising. He wrote: “This inflation shock is global and, like the early post-COVID period, but now driven by supply shortages (oil), not artificially boosted demand. How this supply shock transmits to the global economy will be worth watching.” Treasury Department Raises Quarterly Borrowing Forecast to $189 Billion While the bond market is under pressure, the US Treasury announced a new quarterly borrowing forecast on Monday, further heightening market concerns about supply pressures. The US Treasury said it expects net borrowing of $189 billion this quarter (April to June), about $80 billion more than its February forecast of $109 billion. The main reason for the increase is “net cash flows below expectations,” meaning tax revenues came in under expectations, partially offset by a higher-than-expected beginning cash balance. Without this offset, net new borrowing would actually be $122 billion above the February estimate. Looking forward to next quarter (July to September), Treasury expects to borrow $671 billion, aiming to raise the quarter-end cash balance to $950 billion. Deutsche Bank noted that the third quarter has traditionally been the biggest for annual borrowing needs—$1.058 trillion in 2025, $762 billion in 2024, $1.01 trillion in 2023. Big “UST Event” Coming Wednesday, Market Awaits Treasury’s “Change of Tone” At 8:30 AM ET Wednesday, the Treasury will release its Quarterly Refunding Announcement (QRA), the most important event for the bond market this week. The core market focus is whether the Treasury will change its forward guidance wording. For over a year, Treasury statements have said it will “maintain coupon auction sizes at least over the next few quarters.” Every word of this is now being carefully scrutinized on Wall Street. Brandywine Global portfolio manager Jack McIntyre said bluntly: “They can’t keep saying ‘at least the next few quarters.’ They’ll try to delay, but someday they’ll have to add longer-term issuance.” He explains that if the wording changes from “at least a few quarters” to just “a few quarters,” “the market will say, OK, we have about three more quarters at the current issuance size.” There is no consensus among major Wall Street institutions about potential changes. - JPMorgan: There is “significant risk” Treasury may delete “at least” altogether - Wells Fargo: Either leave it unchanged until end-2026, or delete it completely - Deutsche Bank: Expects “at least” to be deleted but “over the next few quarters” to remain, and sees meaningful coupon increases announced in Feb 2027 - Citi: Considers wording change by Besant very unlikely, pushes back supply increase expectation to May 2027 “at the earliest” - Goldman Sachs: Also expects the increase to be postponed to Feb 2027 Deutsche Bank strategist Steven Zeng expects Treasury will likely remove “at least” but keep “over the next few quarters,” signaling current guidance is nearing its end—coupon supply increases are approaching. Accordingly, they forecast coupon auction size rises to be announced at the Feb 2027 refunding. Morgan Stanley strategist Martin Tobias’s team wrote in a preview: “Recent yield rises make it easier for Treasury to maintain a cautious stance in its forward guidance.” The 10-year yield has risen from 4.27% at the last refunding to around 4.44%. TD Securities strategists remind that any change in language “could trigger market volatility.” Additionally, the market widely expects the upcoming refunding auction sizes next week to be: - May 11: 3-year Treasury, $58 billion - May 12: 10-year Treasury, $42 billion - May 13: 30-year Treasury, $25 billion The Treasury Borrowing Advisory Committee (TBAC) will meet Tuesday, with its statement released alongside Treasury’s announcement. In February, the committee said current forecasts could support coupon increases in fiscal 2027 (from October), and discussed at length the trade-off between “gradually raising auction sizes in advance” versus “speeding up increases if the financing gap widens.” What Else Is the Market Waiting For? In addition to the QRA, this Friday’s nonfarm payrolls report is also a key data point. Economists expect the April jobless rate to remain at 4.3%, with nonfarm payroll growth slowing. Goldman Sachs warned last week that several “alert thresholds” are forming in the market: “Brent at $120, 10/30-year Treasury yields at 4.5%/5.0%, USD/JPY at 160—We’re watching these thresholds carefully, and as they’re approached, they’ll add fuel for any future relief rallies or dollar declines.” Currently, the 30-year US yield has hit 5%, while the other thresholds are approaching. Rate-Hike Bets Surge, Institutions Revise Fed Expectations Oil’s surge has significantly reshaped the market’s expectations for the Fed’s path. The rates swap market shows traders now price about a 70% chance of a Fed rate hike by April 2027. Data puts this probability at about 80%. This contrasts sharply with expectations before the Iran conflict erupted in late February—back then, markets widely expected the Fed to cut rates steadily. Institutional forecasts have also shifted. Barclays on Monday revised its Fed forecast to just one rate cut by March 2027, previously expecting cuts in September 2026 and again in 2027, citing the energy price outlook. Morgan Stanley economists made similar adjustments last week, delaying rate cut expectations to 2027. Morgan Stanley Investment Management portfolio manager Andrew Szczurowski said: “Looking at the bond market’s pricing, concerns over inflation and the duration of this conflict have intensified.” Risk Disclosure & Disclaimer The market has risks. Investment must be cautious. This article does not constitute personal investment advice and does not take into account the individual investment objectives, financial circumstances, or needs of any particular user. Users should consider whether any opinions, perspectives, or conclusions in this article suit their specific situation. Invest at your own risk. ```