The cost of borrowing for the US government has climbed to 5% for the first time since 2023, amid a steep decline in global bond markets driven by increasing oil prices and inflation fears. On Monday, the yield on the 10-year US Treasury bond, a key benchmark, hit the notable 5% mark. Earlier this year, yields had dipped to approximately 4% but began rising steadily following the onset of the US-Israeli conflict with Iran in February. The last time yields surpassed 5% was in October 2023.
This uptick in bond yields coincides with the rise of Brent crude oil prices above $108 per barrel. Oil prices have surged in the wake of attacks on Saudi Arabian energy infrastructure and heightened tensions across the Middle East. Notably, a series of drone attacks necessitated the closure of a vital east-west crude pipeline in Saudi Arabia, sparking concerns about potential disruptions to the global oil supply. The situation is further complicated by actions attributed to Iran-aligned Houthi forces and increased tensions around the Bab al-Mandab Strait.
Growing apprehension over global oil supply has been compounded by Gulf states’ decision to postpone discussions with Tehran regarding a temporary shipping route through the Strait of Hormuz, a critical passageway for a substantial portion of the world’s oil and gas supplies. Rising energy prices are intensifying inflationary pressures and adding uncertainty to the trajectory of global interest rates. Investors are closely monitoring the US Federal Reserve’s upcoming interest-rate decision, with the Bank of England also expected to announce its own decision later this week.
The rise in US Treasury yields is particularly significant for global financial markets, as the 10-year Treasury serves as a benchmark for borrowing costs. Higher yields can lead to increased financing expenses for governments, businesses, and households worldwide. Bond yields have also increased across Europe, with long-term UK government borrowing costs reaching their highest point in decades. The combination of rising energy prices and renewed geopolitical tensions has fueled concerns that central banks may need to maintain tighter monetary policies for an extended period.
Throughout the year, oil prices have experienced significant volatility. Brent crude, which was priced around $72 a barrel before the conflict, surged to about $126 in April before easing over the summer amid hopes for a lasting ceasefire. However, prices have climbed once more as hostilities intensified and diplomatic efforts faltered. With oil prices now exceeding $100 a barrel again, markets are grappling with renewed concerns about inflation, interest rates, and the broader implications of ongoing disruptions to global energy and trade routes.