The US 10-year Treasury yield, a benchmark for mortgage and auto loan rates, climbed two basis points to 5%, its highest level since October 2023, as rising crude oil prices fuelled expectations that the Federal Reserve and other central banks could keep interest rates higher for longer.
The rise in yields was also evident at the shorter end of the curve. The 2-year Treasury note yield, which is more sensitive to the Federal Reserve’s short-term interest rate policy, advanced more than two basis points to 4.666%, after touching its highest level since July 2024 last week.
Yields on longer-dated bonds also rose, with the 30-year Treasury yield gaining two basis points to 5.374%. The sell-off in Treasuries reflects growing investor concerns over inflation risks and rising government debt levels.
Despite expanded buyback operations by the US Treasury Department aimed at stabilising the bond market, the measures have done little to ease concerns among bond investors.
Renewed tensions in the Middle East have added to these concerns by raising the risk of further disruptions to crude oil supplies, potentially putting additional upward pressure on inflation.
Iranian-backed forces have reportedly seized the strategic Perim Island in the Bab el-Mandeb Strait after taking the port city of Mokha on Yemen’s Western coast.
The supply concerns have been compounded by stepped-up Houthi attacks targeting Saudi Arabia. Drones launched from Iraq reportedly damaged the East-West pipeline on Thursday, prompting the Saudi government to shut the key crude oil artery as a precaution.
Against this backdrop, Brent crude, the international benchmark, rose 4% to $108.65 a barrel, compared with around $72 a barrel before the start of the war in Iran in late February. US West Texas Intermediate crude gained 3.75% to $103.75 a barrel.
Higher-for-longer rate fears weigh on Treasury bonds
A US Federal Reserve rate hike now looks almost certain after August inflation data showed that prices for a broad range of goods and services remained elevated, with higher tariffs and the ongoing conflict in the Middle East adding to price pressures.
The latest consumer inflation readings, coupled with the surge in crude oil prices, have further strengthened expectations of a rate increase. Traders were pricing in about a 90% chance of a quarter-percentage-point increase at the central bank’s September 15–16 policy meeting, adding to pressure on US Treasury bonds and yields.
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