The US 10-year Treasury yield, a benchmark for mortgage and auto loan rates, hit a nearly two-decade high on Tuesday, September 15, as elevated crude oil prices strengthened the case for a US Federal Reserve rate hike on Wednesday.
The 10-year yield rose to 5.041%, a level not seen since July 2007. In the previous session, the yield settled at around 5%, and the latest rise has further heightened concerns over borrowing costs for both corporates and businesses.
The move comes at a time when hyperscalers have announced massive investment plans to build AI infrastructure, while rising energy prices are adding to cost pressures for companies and consumers.
The combination of higher borrowing and energy costs could weigh on corporate spending and investment plans, while also squeezing household budgets and dampening consumer demand.
Treasury yields have found support from rising crude oil prices in recent weeks, after the US and Iran exchanged attacks earlier this month following a month-long lull.
The latest consumer inflation report, which came in higher than expected, has further strengthened expectations of a rate hike at the Federal Reserve’s September meeting, with traders pricing in a more than 90% chance of an increase.
These inflation concerns have also added to the pressure on the Fed, with three policymakers dissenting in favour of a rate hike at its July meeting, underscoring concerns over stubbornly high inflation.
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, keeping Treasury yields elevated.
Will the Iran war keep pressure on the Fed?
Crude prices have remained elevated as the US-Iran war disrupts global fuel flows and puts further pressure on consumers and businesses. Brent crude futures briefly touched $110 per barrel earlier this week.
The conflict has effectively closed the Strait of Hormuz, through which around a fifth of the world’s traded oil and gas transits in peacetime, shifting attention to alternative routes such as the Bab el-Mandeb Strait, which Saudi Arabia has been using for oil exports.
However, Iranian-backed forces have reportedly seized Perim Island in the strait after taking Yemen’s port city of Mokha, raising fresh concerns over energy supplies.
The renewed pressure on fuel prices comes as inflation remains above the Fed’s 2% target, adding to concerns over further price pressures. While US President Donald Trump has downplayed the impact of the war and said it would end after the midterm elections, hostilities have shown little sign of easing.
Meanwhile, expectations of a Fed rate hike have put Trump at odds with the central bank. Trump has renewed his call for lower interest rates, arguing that sharply reduced borrowing costs could unleash an unprecedented economic boom.
(With inputs from agencies)
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