By Greg Ritchie

(Bloomberg) -- US Treasuries slumped for a second day as traders slashed bets on the extent of interest-rate cuts expected from the Federal Reserve this year.

Shorter-dated bonds led the move, with the two-year yield jumping as much as 12 basis points to 3.59%. The chance of a second quarter-point Fed reduction in borrowing costs this year fell to about 50%, whereas traders were pricing two cuts as recently as Friday.

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The moves are part of a global bond rout as investors dump debt on fears that the US-Israeli war on Iran will rekindle inflation. Investors that had been betting on a prolonged period of steady interest rates — or in the case of the Fed, further cuts — are rushing to reassess the outlook.

The US 10-year yield rose seven basis points to 4.10%. Comparable UK, French and Italian yields all rose more than 10 basis points. The conflict’s impact on energy supply, which has sent oil and gas prices sharply higher, is key to investor concerns.

The moves in Treasuries are less pronounced than in other bond markets due to a view that US domestic energy production can buffer the economy from global supply shocks. Still, it’s an abrupt shift given US bonds are just off their best month in a year. The haven appeal of Treasuries is seen as limited at this juncture, given the concerns over inflation.

For the European Central Bank, primary causes for concern are “a slowdown in activity and a negative price shock on energy, and therefore inflation,” said Benoit Gerard, a rates strategist at Natixis. “Regarding the Fed, the situation is likely slightly different, as the US is an energy exporter.”

Before this week, Treasures were benefiting from a flight-to-safety trade fueled in part by concerns over artificial intelligence and bets on more Fed rate cuts. That evaporated abruptly as Israel and the US launched strikes on Iran, which soon retaliated in a widening conflict, triggering the surge in oil and gas prices.

--With assistance from Alice Gledhill and Alice Atkins.

(Updates prices throughout.)

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