US 10-Year Treasury Yields Surge Past 5% as Middle East Tensions Fuel Bond Selloff

US government borrowing costs have climbed above 5% for the first time since 2023, as conflict-driven oil prices intensify a selloff in global bond markets.

The yield — effectively the interest rate — on 10-year US Treasury bonds crossed the psychologically significant threshold on Monday amid renewed selling pressure on Wall Street and a rise in global oil prices to $108 a barrel.

With traders awaiting a crucial Federal Reserve interest-rate decision on Wednesday, the benchmark yield has steadily increased from this year’s low of 4% before the outbreak of the US-Israeli war with Iran in late February. It was last above 5% in October 2023.

Rising oil prices are also heightening inflation concerns. The latest increase followed a series of drone attacks that forced Saudi Arabia to close a vital east-west crude pipeline as the conflict’s impact expanded.

Brent crude, the international oil-price benchmark, jumped more than 3.7% on the day to above $108.50 a barrel.

The surge followed several attacks by Yemen’s Iran-aligned Houthi forces against Saudi Arabia and their capture of the strategic island of Perim in the Bab al-Mandab strait on Sunday, extending their control over the waterway.

Oil prices were also pushed higher after Gulf states postponed a meeting with Tehran over proposals for a temporary shipping lane through the Strait of Hormuz, a crucial route through which about one-fifth of global oil and gas supplies normally passes.

Traders in Saudi Arabia have warned that the kingdom could run out of oil available for export unless the east-west pipeline reopens within days.

Gas prices also rose on Monday, with the UK benchmark increasing 5% to 208.73p per therm, its highest level since December 2022.

The increase came despite Donald Trump announcing on Monday an agreement between Ukraine and Russia not to target each other’s energy facilities. He maintained, however, that the politically sensitive rise in US diesel prices was being driven by the war in Europe rather than the conflict in Iran.

As fears of further escalation in the Middle East grow, bond markets have faced intense selling pressure. The yield on the 10-year US Treasury is a global benchmark for valuing other assets, so a rise in Washington’s borrowing costs has implications for governments, companies and households worldwide.

Borrowing costs also increased across Europe on Monday, including the yield on 30-year UK government bonds, which reached its highest level since March 1998.

The developments come as investors await interest-rate decisions from the US Federal Reserve on Wednesday and the Bank of England on Thursday, following the European Central Bank’s decision last week to raise borrowing costs.

With investors expecting the Federal Reserve to raise rates while anticipating a hold from the Bank of England amid growing inflationary pressure, analysts said global bond markets could face another week of volatility.

Daniela Hathorn, a senior market analyst at Capital.com, said markets were entering the week defensively as renewed escalation in the Middle East and more hawkish expectations for central banks weighed on risk appetite.

As wholesale energy prices climbed, petrol and diesel reached new Iran-war highs on Monday, according to the RAC. The average price of petrol rose to 169.68p, while diesel reached 191.68p.

The US-Israeli war with Iran has disrupted oil and gas supplies across the Middle East this year, lifting the oil price from its prewar level of about $72 a barrel to a peak of $126 in April.

Brent crude later retreated over the summer amid hopes of a durable ceasefire, before resuming its advance after a memorandum of understanding between the US and Iran collapsed.

After hostilities intensified, the benchmark again moved above $100 a barrel last week, its highest level since July.

Chris Beauchamp of broker IG said a return to the spring highs looked increasingly likely. “Oil markets are facing their worst fears simultaneously: attacks on energy infrastructure, the closure of Hormuz and the collapse of efforts to restart negotiations,” he said.

“The risk of further disruption is spreading beyond the Gulf, with renewed Houthi attacks on shipping adding another layer of uncertainty to key energy and trade routes.

“The major surprise is how calm markets have remained in the face of these developments, but if prices break above the March highs, conditions could deteriorate quickly.”

Saudi Arabia’s oil output was already under pressure before attacks on its major pipeline. Riyadh recently told the Opec oil cartel that its crude production in August was its lowest since 1990, according to Bloomberg.

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