New York (CNN) — Rising oil prices, persistent inflation fears and shifting expectations for rate hikes are rattling the world’s largest bond market, sending Treasury yields higher and pushing up borrowing costs for consumers.
The 10-year US Treasury yield on Thursday rose four basis points, to 4.71%, its highest 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 US 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.
Markets are pricing in a 36% chance the Fed hikes rates at its policy meeting next week, according to CME FedWatch.
Investors are also demanding a higher yield on Treasuries to compensate for the risk of inflation eating into their return.
The US 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.
Meanwhile, the bond market is adjusting to the start of Kevin Warsh’s term as Fed chairman. Traders are trying to discern the outlook for Fed policy under Warsh.
“That’s probably the biggest driver as of right now, the Kevin Warsh story and how he approaches his position as Fed chair,” Tom Tzitzouris, head of fixed income research at Baird Strategas, told CNN.
Warsh took the reins at the Fed in May after eight years with former Fed Chair Jerome Powell at the helm. The new Fed head has pledged reform at the central bank and appointed task forces to review topics including communications, inflation frameworks and balance sheet policy.
Stocks drop, oil and yields rise
US stocks closed lower Thursday as rising bond yields and a slide in shares of tech companies weighed on markets. The Dow fell 507 points, or almost 1%. The S&P 500 fell 1.2% and the Nasdaq Composite sank 2.15%.
Google parent company Alphabet (GOOG) dropped almost 7% as investors weighed concerns about increased spending plans for the artificial intelligence buildout. Alphabet reported earnings Wednesday and raised its forecast for AI spending.
Meanwhile, Tesla (TSLA) sank 14.5% after reporting quarterly profits on Wednesday that didn’t meet Wall Street’s expectations. Alphabet and Tesla shares had their worst day in over a year.
The Nasdaq is down more than 7% since its last record high in early June. Meanwhile, the S&P 500 is down about 2.5% since its last record high in early June. The Dow is down about 2.5% since its last record high earlier this month.
The war with Iran and rise in energy prices has shifted the outlook for central banks across the globe. The prospect of higher central bank interest rates is pushing bond yields higher in the United States, Europe and Asia.
There are also growing nerves about government deficits across the globe. The war with Iran so far has cost the United States $37.5 billion, Defense Secretary Pete Hegseth said on Tuesday.
Higher deficits mean governments could have to issue more bonds to pay for their spending. An increase in supply of bonds coupled with nerves about shakier government finances could prompt traders to demand higher yields. The 30-year yield in May hit its highest level since 2007.
The bond market moves come days after JPMorgan Chase CEO Jamie Dimon said in an interview that he wouldn’t purchase long-dated US Treasuries, like 10-year bonds, at current prices.
Dimon, speaking on The Master Investor Podcast with Wilfred Frost, said he doesn’t see the appeal of Treasuries amid lingering concerns about inflation and government deficits.
Dimon said deficit issues facing major economies, including the United States, “will become a problem.”
“That will exhibit itself with higher interest rates, the market getting rattled a little bit, people talking about constantly remember the bond market, the bond market vigilantes,” Dimon said. “Hopefully not worse than that, but it could be worse than that.”
For now, traders are watching to see whether tensions around the Strait of Hormuz and the Red Sea will escalate or ease.
“Unless signs of de-escalation across the various conflicts emerge, the risks to oil prices are skewed to the upside,” Hamad Hussain, climate and commodities economist at Capital Economics, said in an email.
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