The benchmark U.S. 10-year Treasury yield climbed to its highest level in 19 years on Tuesday, as oil prices surged amid the Iran conflict and investors increasingly expected the Federal Reserve to raise interest rates on Wednesday. Because the 10-year yield is a key benchmark for consumer loans and corporate funding, the move could have broader effects across the economy.
The 10-year yield was last up by more than 3 basis points at around 5%. Earlier in the session, it touched 5.041%, its highest level since July 2007. One basis point equals 0.01 percentage point, and bond yields move inversely to prices.
The yield on the longer-dated 30-year Treasury bond, which is more sensitive to geopolitical risks, rose 4 basis points to 5.368%. Earlier, it reached 5.401%, also its highest level since June 2007.
The 2-year Treasury note yield added more than 1 basis point to 4.648%. It had previously climbed to 4.688%, the highest level since July 2024.
The move came as the Fed opened its two-day policy meeting. After August inflation remained well above the central bank’s 2% target, markets increased their bets that the Fed will deliver a 25-basis-point rate hike when the meeting concludes on Wednesday. According to the CME FedWatch tool, traders are pricing in a probability of more than 92% for such a move.
Jonathan Liang, Standard Chartered’s CIO of fixed income and FX, told CNBC that U.S. 10-year Treasurys are highly sensitive to inflation expectations, and that this close relationship is likely to persist as long as inflation gauges remain above the Fed’s 2% target.
Experts cited by CNBC said the tight relationship between oil and Treasurys could keep pushing yields higher if crude prices stay elevated, since rising energy costs feed into inflation expectations.
BMO Capital Markets said the one-month rolling correlation between front-month West Texas Intermediate crude and the 10-year Treasury yield has climbed to 0.96.
WTI crude oil rose again on Tuesday, topping $102 a barrel as the Iran conflict dragged on and the Strait of Hormuz remained effectively blocked. After spiking at the onset of the war earlier this year, crude traded below $70 a barrel in July on expectations that an MOU signed by U.S. and Iran would lead to de-escalation. Prices have since rebounded after Iran and U.S. resumed attacks and oil inventories declined.
Diesel gasoline, used by trucks and other transport vital to the economy, recently topped $6 a gallon, adding to inflation concerns. Steve Sosnick, chief strategist at Interactive Brokers, said that, put simply, higher oil prices lead to higher inflation expectations and vice versa. He added that the relationship is not usually this clean, but geopolitical drivers behind oil prices and global inflation are currently so dominant that what is normally a modest correlation has become much tighter. As long as oil prices stay firm and continue to rise, he said, pressure on interest rates is likely to persist.
