Bond market shock: 10-year US Treasury yield tops 5% as oil spike puts Federal Reserve on rate-hike path

US Treasury bond yields surged on Monday, with the 10-year Treasury yield rising above 5% for the first time since October 2023, as a jump in crude oil prices revived inflation fears and pushed investors to price in another Federal Reserve rate hike this week.

The 10-year Treasury yield climbed past the 5% mark, while the 30-year yield hovered around 5.38%, reflecting fresh pressure across the long end of the bond market.

The move came as Brent crude rose to $108 a barrel, stoking worries that higher energy prices could keep inflation sticky. Investors are now betting heavily that the US central bank will raise interest rates by 25 basis points at its September 15-16 policy meeting.


The Fed will announce its decision at 2 pm in Washington on Wednesday after a two-day meeting. Markets expect policymakers to lift the benchmark rate to a 3.75-4% range and signal that more tightening may be needed if inflation does not cool.

Also Read: AI slowdown trade hits Nvidia, SoftBank, SK Hynix as global tech stocks fall up to 10%

Why Treasury yields are rising

Several forces are driving the selloff in bonds. The first is inflation. Higher oil prices can lift headline inflation and also affect transport, production and consumer costs. If companies pass on higher input costs, underlying inflation may stay sticky.

The second is resilient economic growth. A strong economy gives the Fed less reason to cut rates and more room to keep policy tight.

The third is government borrowing. The US government continues to issue large amounts of debt, and investors are demanding higher yields to absorb that supply.

There are also questions about foreign appetite for Treasuries. Some foreign investors have shown signs of diversifying away from US government debt, reducing one of the traditional sources of demand for Treasuries.

Another factor is corporate borrowing linked to artificial intelligence and data centres. Companies are raising large sums to fund data centre expansion and AI-related investment. That has increased competition for investor capital at a time when the government is also borrowing heavily.

Oil price shock revives inflation fears

The rise in yields shows how quickly the bond market has turned cautious again. For much of the year, investors had looked for signs that inflation was moving closer to the Fed’s 2% target. But the latest inflation data and the oil spike have made that confidence harder to sustain.

US core consumer inflation, which excludes food and energy, rose 0.3% last month from the previous month. That pace remains too high for the Fed’s comfort. The pressure from oil prices adds another risk, especially as renewed hostilities in the Middle East have pushed crude above $100 a barrel.

Federal Reserve Chairman Kevin Warsh has avoided giving clear guidance on the path of interest rates. But his own focus on price stability, financial market signals and inflation risks has left investors expecting a hike.

At Jackson Hole last month, Warsh said he wanted to see inflation moving towards 2% “clearly and at sufficient speed.” The latest data and crude oil move do not give the Fed that comfort.

Disclosure: This article has been written by Podishetti Akash, who is not a SEBI-registered Research Analyst or an Investment Adviser. Podishetti Akash and her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment.