U.S. Treasury sell-off eases as traders weigh possible central bank responses to inflation

Yields on U.S. Treasurys were slightly lower early Tuesday as selling pressure eased following sharp losses Monday, and traders weighed possible central bank responses to renewed inflation concerns.

The 10-year U.S. Treasury note yield — the key benchmark for mortgage and auto loans and credit card debt — was about half a basis point lower, at 4.619%. The longer-dated 30-year Treasury bond yield, more sensitive to political risk, was last seen holding steady, at 5.149%.

The 2-year Treasury note yield, which reacts to expectations of short-term Federal Reserve interest rate moves, was down a fraction to 4.084%.

One basis point equals 0.01%, and yields and prices move in opposite directions.

Treasurys are resetting after yields soared on Monday, when U.S. 10-year note yields at one point touched their highest level in 15 months.

Yields on 10-year German bunds dropped more than 1 basis point to 3.147% early Tuesday. The yield on 10-year U.K. gilts — the benchmark for British government debt — remains above 5%, at 5.115%.

Yields on longer-term government debt in the U.K. and Germany are also elevated.  The yield on German 30-year bunds stood at 3.684% Tuesday, with Britain's 30-year gilt yield rising less than 1 basis point to 5.773%.

The prevailing sentiment across global bond markets is being driven by the impact of higher inflation, primarily caused by soaring energy costs, as well as deficit concerns and, in the U.K., country-specific political turmoil, said Mohit Kumar, chief economist and strategist at Jefferies.

"Even if we get a [Middle East] deal … oil is not going back to pre-war levels. We think it's going to be 25-30% higher in six months' time," Kumar told CNBC's "Europe Early Edition" Tuesday.

Brent crude, the international oil benchmark, last traded about 1.5% lower at $110.38 a barrel. U.S. West Texas Intermediate was little changed at $108.67.

Kumar also highlighted the effect of yawning government deficits. "Every government is going to provide subsidies for households for fuel — which means we have more borrowing, and that's a pressure at the long end of the curve," the economist said.

While the market is currently pricing in rate hikes, he said that "it's not justified" given that inflation is likely to rise as much as growth is likely to fall.

A Bank of America survey published Tuesday showed 62% of global fund manager respondents expect 30-year Treasury yields to hit 6%, equaling the highest level since late 1999 and an increase of about 85 basis points from current prices. Only 20% of respondents are targeting a 30-year yield of 4%.