Benchmark 10-year yields approach August highs as oil prices gain

U.S. Treasury yields rose on Tuesday as oil prices gained, with benchmark 10-year note yields approaching levels reached in August, which if surpassed would be the highest since 2007.

Oil prices increased on Tuesday for a fourth consecutive session, raising fears that higher commodity prices will keep price pressures elevated and lead the Federal Reserve to raise rates further, or keep them elevated for longer.
 

"We have a bit of an upward bias on yields as a function of higher energy prices and increasing concern that that's going to flow through to end users and complicate the Fed's job of attempting to engineer a soft landing," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.
 

The 10-year yields reached 4.365%, just below the 4.366% level reached on Aug. 22, which was the highest since 2007.

The U.S. central bank is expected to keep rates unchanged when it concludes its two-day meeting on Wednesday, though investors will be focused on any new indications that further hikes could be forthcoming.
 

Fed officials will release their latest predictions on the economy and where rates are likely to be over the coming quarters.

Lyngen said that expectations for the employment rate may be key "as that's really the one component that has allowed the Fed to continue its battle against inflation without having to risk overshooting."
 

"As long as the job market remains resilient the Fed will be able to continue to push rates higher if need be, and more importantly avoid cutting rates as long as possible," Lyngen added.
 

Fed funds futures traders are pricing in a 29% chance of a Fed hike in November, and a 40% probability of an increase by December, according to the CME Group's FedWatch tool.
 

Data on Tuesday showed that U.S. single-family homebuilding fell in August, likely as a resurgence in mortgage rates weighed on demand for new construction.
 

Two-year yields reached 5.094%, the highest since August 28. The yield curve between two-year and 10-year notes was last at minus 75 basis points.
 

Five-year Treasury yields rose to 4.506%, matching levels last reached in October, which if broken would be the highest since 2007.
 

The U.S. Treasury Department will sell $13 billion in 20-year bonds on Tuesday and $15 billion in 10-year TIPS on Thursday.