US bond yields climb as Iran strikes renew inflation worries

US Treasury yields climbed on Monday, with the benchmark 10-year note reaching its highest level since mid-January, as renewed military exchanges between the United States and Iran pushed crude prices higher and fanned inflation concerns.

The yield on the 10-year Treasury note rose 3.6 basis points to 4.758%, after touching 4.768% earlier in the session — its highest since January 15, 2025. For the month, the yield is up 1.5 basis points, marking a second straight monthly advance.

US forces struck two Iranian launchers on Iran's Larak Island on Sunday, the first known American strikes on Iran since late July. Iran responded by attacking US forces stationed in Jordan. Iranian President Masoud Pezeshkian said on Monday that the country still seeks a negotiated solution, while US President Donald Trump promised further strikes.

The conflict has kept crude prices elevated, with US crude rising 2.7% to $85.61 a barrel and Brent climbing 2.5% to $90.34. Persistently high energy costs, particularly for consumer fuel, have stoked inflation and driven yields higher as investors anticipate the Federal Reserve may need to raise short-term rates to dampen price pressures.

Market expectations for a rate hike of at least 25 basis points at the Fed's upcoming meeting now stand at 66.1%, up from 57% in the prior session and 41.4% a week ago. The shift follows Fed Chair Kevin Warsh's comments last week that the central bank would "have work to do" if policymakers were not confident inflation would return to its 2% target.

The yield on the 30-year bond gained 4.8 basis points to a session high of 5.256%, its highest since August 21. The two-year yield, which moves in step with rate expectations, edged up 0.2 basis point to 4.352%, on track for a sixth straight monthly climb.

"Crude being back up complicates the inflation picture, especially if that's sustained," said JoAnne Bianco, partner and senior investment strategist at BondBloxx Investment Management in Chicago. "There's still a lot of uncertainty about what Fed policy will actually be and what they'll do in September and beyond."

A flurry of labor market data is scheduled for release this week, culminating with the government's payrolls report on Friday. The yield curve gap between two- and 10-year notes stood at a positive 40.8 basis points.