Treasury bonds faced selling pressure on Thursday as oil prices climbed sharply once again, fueled by escalating Middle East tensions that stoked concerns over global supply, sending Brent crude surging to $107 per barrel. The losses in the bond market widened after producer price index data further solidified expectations that the Federal Reserve will raise interest rates at its policy meeting next week.

A well-received auction of 30-year Treasuries, with a stop-out yield 2.7 basis points below the pre-auction trading level, briefly stemmed the decline. However, the downturn resumed after the Treasury's debt buyback operation fell short of expectations, while swap spreads narrowed. Shortly after 3 p.m. in New York, the short end of the yield curve rose as much as 12 basis points, with the curve exhibiting a bear-flattening trend and long-end yields climbing approximately 7 basis points on the day.

The yield curve flattened further following the strong 30-year auction, but the yield differential rebounded quickly after the Treasury released its buyback results. The results showed that the Treasury purchased between $6 billion and the maximum amount in 10- to 20-year maturities. The stop-out yield on the 30-year auction came in 2.7 basis points below pre-auction levels, with primary dealers receiving a record-low allocation. The robust auction outcome provided some support to the long end of the curve and extended the day's flattening until the buyback results were released around 2 p.m. in New York.

During the morning session in the U.S., rising oil prices exerted considerable downward pressure on Treasuries. In the afternoon, WTI futures climbed about 6%, hovering near their session highs, which pushed bond yields close to their daily peaks. There was also demand during the U.S. morning for put options on 10-year Treasury notes expiring in December, targeting yields breaking above 5%. In late trading, the 10-year yield was approximately 4.945%, up 10 basis points on the day.

The sell-off at the short end of the curve drove a more hawkish repricing of Fed policy expectations. By the close, the overnight index swap market had priced in roughly 18 basis points of tightening for the September Fed meeting and a cumulative 45 basis points of hikes across the remaining three meetings this year.