US Treasury prices declined on Friday, pushing yields back up. Persistently elevated energy costs have intensified concerns about the inflation outlook and strengthened investor expectations that the Federal Reserve will raise interest rates further.

After sharp swings earlier in the week, Treasury yields once again moved toward recent highs. On Friday, the two-year Treasury yield, which is most sensitive to changes in Fed monetary policy, rose 4 basis points to 4.79%, while the 10-year Treasury yield climbed to 5.25%. Earlier in the week, strong demand at US government debt auctions had briefly lifted bond prices and pushed yields lower, but that rally failed to hold through the weekend.

Brij Khurana, a portfolio manager at Wellington Management, said the market is digesting an extremely turbulent week. With yields still below recent peaks, bond prices often stabilize first before choosing a new direction.

In recent weeks, long-term government bonds worldwide have faced sustained selling pressure. Energy price increases triggered by the Iran war have raised investor concerns that inflation in the US and other major economies could worsen further, prompting markets to bet on more hawkish monetary policy from central banks. At the same time, widening government fiscal deficits have further eroded investor confidence in long-term bonds.

Driven by both inflation and fiscal worries, the US 30-year Treasury yield earlier this week briefly climbed to its highest level since 2002. However, strong investor demand at Thursday's auctions of 10-year and 30-year US government debt temporarily eased concerns about insufficient demand for long-term bonds and pushed Treasury yields lower.

In energy markets, Brent crude oil prices fluctuated around $104 per barrel on Friday. US President Donald Trump said he would delay further military strikes on Iran until after the US midterm elections and stated that Russian President Vladimir Putin has agreed to release diesel supplies to global markets. Although this news somewhat eased energy supply concerns, oil prices remain elevated, suggesting that energy costs may continue to pressure inflation and thus limit the Fed's room to ease monetary policy.

Padhraic Garvey, head of Americas research at ING, believes it is still too early to declare that the rise in US Treasury yields is over. Garvey said the market currently seems more inclined to look for reasons to sell bonds rather than opportunities to buy them. He noted that no sufficiently convincing signal has emerged to prompt investors to aggressively buy US Treasuries and drive yields significantly lower.

Next, market attention will shift to the US Consumer Price Index (CPI) report due next Wednesday. This data will provide investors with important clues for assessing US inflation trends and the Fed's subsequent interest rate policy.

The Fed implemented its first rate hike since 2023 last month, but markets currently expect only about a 20% probability that the Fed will raise rates again at its October meeting. In contrast, traders have fully priced in a Fed rate hike at the December meeting.

Marc Chandler, chief market strategist at Bannockburn, said he is more worried about next week's market movements. If the upcoming CPI data comes in strong, it could further boost market expectations for the Fed to tighten monetary policy and drive long-term US Treasury yields even higher.