US 10-Year Treasury Yield Hits Highest Level Since January 2025 as Oil Climbs

Bond Markets and Crude Oil Prices React to Middle East Conflict

Renewed hostilities in the Middle East are driving a prolonged selloff in U.S. government bonds, sending yields to new 18-month highs and lifting borrowing costs for businesses and consumers. According to Tradeweb, the yield on the benchmark 10-year U.S. Treasury note reached 4.711% in early trading Thursday, its highest intraday level since January 2025. Prior to the war with Iran, which started in late February, the 10-year yield dipped below 4%. Renewed tensions between Washington and Tehran have pushed up oil prices once again, with Brent crude surging 7% on Thursday to hit $100 per barrel. The conflict has rocked the massive U.S. Treasury market — with roughly $30 trillion in value — as investors weigh the impact of surging oil prices and the possibility that the Federal Reserve could keep interest rates higher for longer, or even raise them, if inflationary pressures intensify. Bond yields rise when prices fall. The U.S. 10-year yield helps determine borrowing costs across the economy, including the 30-year mortgage rate. The average 30-year fixed mortgage rate was 6.58% this week, the highest level in almost a year.

The climb in debt yields was fueled directly by energy markets. Brent crude futures gained 7% to close at $100.69 a barrel, the highest since before the U.S. and Iran reached a tentative peace deal last month. U.S. West Texas Intermediate crude futures advanced 6% to $92.19 a barrel. Oil prices continued to climb on Thursday, with Brent crude futures on pace for their third-largest monthly gain in the past 10 years, following reports of Houthi rebel attacks on tankers off the Red Sea coast of Saudi Arabia, and renewed U.S. threats to escalate strikes against Iran.

The economy may be heating up today, but the path ahead for the employment markets could still be rockier with the escalation of the war in the Middle East causing a u-turn in energy prices virtually overnight this week.

Federal Reserve Rate Expectations Shift as Traders Price in September Hikes

As inflation fears heightened, expectations that the Federal Reserve will raise interest rates increased as well, with fed funds futures traders pricing in a more than 80% chance that the central bank will raise interest rates at its September meeting. U.S. Treasury yields advanced on Thursday as Brent crude oil’s climb above $100 per barrel raised inflation fears, and as weekly claims for unemployment insurance tumbled below 200,000. The yield on the 10-year U.S. Treasury note — the key benchmark for mortgage and auto loans and credit card debt — was last seen up more than 4 basis points at 4.699%. It earlier rose above 4.7%, hitting the highest level since Jan. 15, 2025. The 2-year Treasury note yield, which more closely tracks short-term Federal Reserve interest rate policy, rose more than 5 basis points to 4.353%. The longer-dated 30-year Treasury bond yield was higher by 2 basis points, reaching 5.167%. One basis point equals 0.01%, and yields and prices move inversely to one another.

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The bond market is also adjusting to the start of Kevin Warsh’s term as Fed chairman. Traders are trying to discern the outlook for Fed policy under Warsh. The yield on the U.S. 10-year Treasury note has reached 4.70%, marking its highest level since January 2025. This development has spurred discussions about the possibility of an imminent Federal Reserve rate hike, particularly as a test of Kevin Warsh’s credibility as Fed Chair. Market observers are closely watching this indicator, which serves as a critical gauge of long-term borrowing costs and inflation expectations. The rise in yields is consistent with increased speculation about a potential rate adjustment in the coming months, with current market pricing suggesting heightened expectations for a rate hike by September. Market participants are likely to keep a close eye on upcoming Federal Reserve meetings, particularly the one scheduled for September 15–16, to gauge any shifts in monetary policy. Key indicators such as inflation data and Fed communications will be crucial in shaping market expectations.

Global Deficit Pressures and Market Reactions Compound Unease

Renewed hostilities in the U.S.-Israeli war with Iran and revived inflation risks have done little to sway most bond strategists surveyed by Reuters who still expect shorter-dated U.S. Treasury yields to fall as markets abandon bets for Federal Reserve rate hikes. Treasuries came under pressure this week after oil prices surged nearly 10% as the conflict escalated again, reversing a brief return to pre-war levels, as expectations the Fed will keep interest rates higher for longer pushed yields to multi-week highs. The benchmark 10-year yield climbed to around 4.6% and the 30-year moved back above 5.0%, with several Fed policymakers warning inflation could prove persistent. U.S. inflation is currently more than twice the Fed’s 2% target. Markets fully priced out Fed rate cuts after the war began and now imply roughly one to two quarter-point hikes this year. Economists in separate Reuters surveys have also steadily removed their rate reduction views since April with a strong majority now predicting a hold. But bond strategists have stayed remarkably consistent in their outlook. The rate-sensitive two-year yield, currently a shade below an 18-month high at 4.20%, was still predicted to fall in the July 6-9 poll, though slightly less than June forecasts — about 20 basis points in three months to 4.00%, to 3.90% in six and 3.85% in a year.