The benchmark 10-year Treasury yield climbed to its highest levels in 19 years on Tuesday as oil prices surge from the Iran conflict and expectations grow that the Federal Reserve will raise interest rates on Wednesday. The rate milestone could ripple through the economy as the 10-year yield is a benchmark for consumers loans and corporate funding.
The 10-year yield was last up more than 3 basis points to around 5%. Earlier in the session, it scaled to 5.041%, the highest since July 2007. One basis point equals 0.01 percentage point, and yields and prices move in opposite directions.
The yield on the longer-dated 30-year Treasury bond, more sensitive to geopolitical risks, rose 4 basis points to 5.368%. The yield had hit a high of 5.401% — also its highest level since June 2007.
The 2-year Treasury note yield climbed more than 1 basis point to 4.648%. It had earlier reached its highest level since July 2024 at 4.688%.
The move comes at the start of the Fed’s two-day policy meeting, with markets pricing in higher chances of a quarter-point rate hike when the meeting concludes Wednesday after August inflation remained well above the central bank’s 2% target. Traders are pricing in a more than 92% chance that the Fed will raise rates by 25 basis points in its latest meeting, according to the CME FedWatch tool.
“U.S. 10-year treasuries are highly sensitive to inflation expectations, and with inflation gauges still above the Fed’s target of 2%, we believe this tight correlation will likely persist for a while,” said Jonathan Liang, Standard Chartered’s CIO of fixed income and FX.
The tight relationship between oil and Treasurys could add further upward pressure on yields if crude prices remain elevated, as higher energy costs feed into inflation expectations, experts told CNBC.
The one-month rolling correlation between front-month West Texas Intermediate crude and the 10-year Treasury yield has climbed to 0.96, according to BMO Capital Markets.
WTI crude oil was higher again on Tuesday, topping $102 a barrel as the Iran conflict drags on and the Strait of Hormuz remains essentially blocked. After surging during the onset of the war earlier in the year, crude oil traded below $70 a barrel in July on expectations an MOU signed by U.S. and Iran would lead to a de-escalation in the conflict. Prices have since rebounded as Iran and U.S. restarted attacks and oil inventories declined. Diesel gasoline, used by trucks and other key transport for the economy, recently topped $6 a gallon, further flaring inflation concerns.
“Speaking simplistically, higher oil prices lead to higher inflation expectations and vice versa,” said Steve Sosnick, chief strategist at Interactive Brokers.
“Normally, the relationship isn’t as clean as it is now, but the geopolitical drivers behind the price of oil and global inflation are so prominent that the normally modest correlation has become much tighter,” he told CNBC via email.
“As long as oil prices remain firm and continue to drift higher, this will add pressure to interest rates,” he added.
