Oil price surge and inflation fears push US bond yields to multi-year highs

Bond markets came under renewed pressure on Thursday as US 30-year bond yields hit a more than 20-year high, driven by rising oil prices that reignited fears of higher inflation and more Federal Reserve interest rate hikes. Oil prices climbed about 3% to a one-week high after a Houthi missile attack on Saudi Arabia revived fears of supply disruptions. Trade was volatile, and prices came off session highs after reports that the US and Iran discussed reopening the Strait of Hormuz.

Market Yields And Federal Reserve

The interest-rate-sensitive US 2-year note rose 2.51 basis points to 4.92%. The yield on benchmark US 10-year notes increased 8.17 basis points to 5.196%, the highest since 2007. The 30-year bond yield gained 7.96 basis points to 5.4816%, the highest since 2004. Gennadiy Goldberg, head of US rates strategy at TD Securities, said the move higher in Treasury yields was likely driven by rising Fed hike expectations, higher growth expectations, higher oil prices, fiscal concerns, and hyperscaler issuance, along with investor positioning amid a rapid resurgence of oil prices. Two Fed policymakers stated on Thursday that the US central bank will likely need to raise interest rates again to curb unacceptably high inflation. Fed funds futures traders are now pricing in 71% odds of a Fed hike next month, up from about 53% before Wednesday's data. Thursday's market moves followed a sharp selloff on Wednesday when benchmark 10-year yields posted their largest daily increase since the April 2025 tariff turmoil, driven in part by stronger-than-expected US business activity data showing prices paid surged to a nearly four-year high.

Auctions, Equities And Global News

The Treasury Department saw mediocre demand for a $44 billion auction of 7-year Treasury notes on Thursday, following weak interest at Wednesday's $70 billion sale of 5-year debt. Separately, the Treasury bought back $4.078 billion in 20- to 30-year bonds to support market liquidity, out of $10.468 billion offered during the operation. In equities, the Dow Jones Industrial Average fell 0.31%, while the S&P 500 and Nasdaq Composite were roughly flat. MSCI's World Index dropped 0.29%, and the pan-European STOXX 600 index fell 0.55%. Traders worry higher bond yields could derail the equity rally by making borrowing more expensive and drawing investors out of stocks and into bonds. Antonio Del Favero, head of US rates strategy at Macro Hive, said financial conditions still appear supportive of a resilient economy and stock market absent a drop of 20% or more in the S&P 500. Meanwhile, US President Donald Trump welcomed Chinese President Xi Jinping to the White House on Thursday for a state summit, where Treasury Secretary Scott Bessent said the two sides reached a deal on an initial two-month extension of their trade truce.