US Treasury bonds, along with global bonds, continued the broader streak of selling off as oil prices surged on Monday on fading hopes of a diplomatic breakthrough between Washington and Tehran over the Strait of Hormuz.
Brent crude rose more than 3% to as high as $108.27 a barrel in London morning trading after US President Donald Trump rejected an Iranian proposal to reopen the strategic waterway over the weekend.
In US, the benchmark 10-year yield was up 0.05 percentage points to 5.23% while the 30-year bond yield topped 5.5% with both trading around multiyear highs.
The policy-sensitive two-year Treasury yield also climbed 0.05 percentage points to 4.92%.
Equity futures weakened as investors assessed the prospect of another period of elevated inflation and higher interest rates.
Futures tied to the S&P 500 fell 0.33%, while Nasdaq 100 futures dropped 0.44%.
“Even though US-Iran talks could resume this week, there was little sign of a breakthrough over the weekend and bond yields and oil have climbed again this morning,” said Jim Reid, global head of macro research at Deutsche Bank, describing the conflict as a “stalemate”.
Oil shock adds to inflation and rate concerns
Oil prices have risen sharply as the conflict has disrupted energy flows and raised concerns about the Strait of Hormuz, through which a significant share of global oil shipments passes.
A prolonged disruption could feed directly into fuel and transportation costs and make it harder for central banks to bring inflation down.
US borrowing costs had already been climbing in recent weeks as investors reassessed the outlook for inflation and economic growth.
The Federal Reserve raised borrowing costs for the first time since 2023 earlier this month.
Futures markets are now pricing in two additional quarter-point increases by January, a notable reversal from expectations for rate cuts that prevailed before the US-Iran conflict sent energy prices higher.
The combination of resilient US economic activity and renewed energy inflation has therefore complicated the outlook for monetary policy.
Higher oil prices can lift headline inflation while stronger-than-expected economic data can give policymakers less reason to ease financial conditions.
That has left investors facing the prospect of interest rates remaining restrictive for longer.
Global bond sell-off broadens
The pressure was not confined to US government debt.
UK government bonds weakened further on Monday, with the 10-year gilt yield rising 0.06 percentage points to 5.42%.
That level was close to the highest since 2008.
Germany’s 10-year Bund yield climbed 0.03 percentage points to 3.65%, leaving borrowing costs at their highest level since 2011.
French and Italian 10-year government bond yields also rose to their highest levels since the Middle East conflict began.
French borrowing costs reached their highest level since 2008.
Two-year Japanese government bond yields rose as much as 0.05 percentage points to 1.98% before easing to about 1.97%. The securities had not traded above 2% since 1995.
The move came after the release of minutes from the Bank of Japan’s July meeting, which showed that some policymakers were calling for faster interest-rate increases to contain inflation expectations.
Ecaterina Bigos, senior market strategist at BNP Paribas Asset Management, said part of the pressure on global bond markets was linked to increased issuance by companies seeking to finance the build-out of artificial intelligence infrastructure.
That has created a “competition for capital”, she said.
The rapid expansion of AI infrastructure has prompted companies to raise large amounts of debt to finance data centres, computing capacity and related investments.
That additional supply of corporate bonds can compete with government debt for investor capital, potentially contributing to upward pressure on yields.
Jobs report becomes key test for Treasury yields
The Treasury market now faces an important week of economic data, with investors awaiting the August personal consumption expenditures report and September employment figures.
Economists expect the headline PCE price index to rise 0.4% month over month in August, compared with 0.2% in July.
On an annual basis, it is expected to remain at 3.7%.
Core PCE, which excludes food and energy prices, is forecast to rise 0.3% month over month, up from 0.2%, while remaining at 3.3% year over year.
The inflation report may have a relatively limited market impact because expectations have already incorporated information from earlier consumer and producer price reports.
The September jobs report could prove more consequential.
Economists expect the US economy to have added just 100,000 jobs in September, down from 162,000 in August.
The unemployment rate is expected to remain unchanged at 4.1%.
However, recent business-survey data have raised questions about whether employment growth could surprise on the upside.
The S&P Global US PMI report released on Sept. 23 said US private sector employment rose in September at its fastest pace since June 2022 and at a pace rarely exceeded since 2009.
That reading has increased the possibility that the official jobs report could be stronger than the current consensus estimate.
5.25% yield seen as critical threshold
The latest rise in Treasury yields has brought the 10-year note closer to a technically important level.
Michael Kramer, founder of Mott Capital Management, wrote for MarketWatch that the 10-year and 30-year Treasury yields were approaching major technical resistance levels that could trigger another sharp move higher.
The 10-year yield was sitting just below 5.25%, an area that dates back to July 2007.
“Currently, the 10-year Treasury yield is sitting just below an area of technical resistance at 5.25% that dates back to July 2007, which could be a delicate line in the sand. A breakout that sends the 10-year over 5.25% could see a rise to 5.6% – even to as much as 5.9% can’t be ruled out,” he said.
Kramer also argued that relatively subdued expectations for the jobs report could leave yields vulnerable to an upside surprise.
Six per cent yield would raise economic risks
Some market strategists are already considering the possibility of the 10-year Treasury yield reaching 6%.
“Traders look at round numbers, and above 5% means that the next stop could be 5.5% and 6%,” Jose Torres, a senior economist at Interactive Brokers, said in a Business Insider report.
“And in this post-Great Financial Crisis economy, it’s not a yield that’s tolerable for financial markets.”
Padrhaic Garvey, regional head of research, Americas, at ING, told Business Insider that yields could climb to 6% in the near future, a level that would represent the highest 10-year yield since 2000.
“The danger period of going from 5% to 6%, if that was to happen in the next couple of months, it would be something quite difficult for the market,” he said of that risk scenario.
FedWatch founder and chief investment officer Ben Emons has also projected a potential move to 6% by January 2027.
He said the US economy is currently accelerating, helping explain why financial markets have so far been able to absorb higher interest rates.
But the consequences could become more significant if yields climb substantially further.
During an interview with CNBC, Emons said a 6% 10-year Treasury yield could push real interest rates above 3.5% and potentially toward 4%.
“At that level, I would think that rates are that restrictive, the economy starts to slow down much more than we’re seeing currently,” Emons added.
Emons said such a move would likely increase volatility across financial markets, particularly against the backdrop of relatively subdued levels of the CBOE Volatility Index.
His 6% scenario is initially based on market mathematics, with the forward-discounted 10-year yield already around 6% or higher.
A break above roughly 5.3%, he said, would make 6% a “very probable scenario.”
This post Bond selloff deepens: why experts are already discussing 10-year yields hitting 6% may be modified as updates unfold
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