As hopes for a deal between the United States and Iran collapsed, oil prices rose in response and the selloff in the US Treasury market intensified, pushing US borrowing costs to their highest level since the global financial crisis.
Brent crude briefly climbed more than 4% to hit a high of $108.83 a barrel. Earlier, US President Donald Trump rejected Iran's proposal to reopen the Strait of Hormuz, clouding the prospects for ending the seven-month war. Oil prices later pared gains and settled at $105.28 a barrel, up 0.9%.
In the Treasury market, selling pressure returned, with the yield on the 10-year Treasury note briefly rising 0.09 percentage point to 5.27%, the highest since June 2007 and its fifth straight session of gains. Since US Treasury Secretary Bessent announced an expanded bond buyback program in mid-August aimed at stabilizing the market, the yield has risen by more than 0.5 percentage point.
Separately, the rate-sensitive two-year Treasury yield rose to 4.96% on the day, a 28-month high. The Wall Street Journal's 10-year Treasury data dashboard showed the yield briefly spiking to 5.27% on September 28.
Ian Lyngen, head of US rates strategy at BMO Capital Markets, said: "The potential shock to the global economy from a (US) war with Iran remains a key driver in the macro market narrative. One day, energy price fluctuations will no longer have such a huge impact on US interest rates. Clearly, the market has not yet reached that turning point."
Lyngen noted that selling pressure on the 10-year Treasury could push its yield above 5.35%, a level that would attract investors back in. If the yield reached that level, it would mark the highest in nearly a quarter of a century.
In fact, rising bond yields and oil prices also weighed on US stocks, with the S&P 500 closing down 0.8% and the Nasdaq 100 falling 1.1%.
In recent weeks, US borrowing costs have surged to pre-global-financial-crisis levels, as the world's largest economy shows signs of persistent inflation, prompting investors to bet on further rate hikes. As the bond selloff drives up borrowing costs for Americans, the surge in Treasury yields has also pushed US mortgage rates above 7%, just weeks before critical midterm elections in which the cost-of-living crisis has become a central issue.
US voters are dissatisfied with Trump's handling of the economy, sending his approval rating sharply lower. Polls show voters are deeply uneasy about the Iran war he launched and its costs.
Earlier this month, the Federal Reserve raised borrowing costs, its first rate hike since 2023, and futures market investors are betting on two more 25-basis-point hikes by January — a marked shift from expectations of rate cuts before the US-Iran war sent energy prices soaring.
Ajay Rajadhyaksha, global head of research at Barclays, said these yield levels "have nothing magical about them," and that reversing the selloff would require some substantive change, such as higher rates starting to "bite" risk assets like stocks. "That would be a signal that we may have hiked enough."
On the 19th of last month, the US Treasury announced that total US national debt had surpassed $40 trillion for the first time. Related institutions and observers have warned that a new fiscal crisis is brewing, as spending on social security programs and interest payment costs surge far beyond the fiscal revenue suppressed by tax cuts.
On August 19, 2026, in New York, a screen displayed that total US federal government debt had breached the $40 trillion mark. The Washington Post previously reported that, faced with a public debt problem that has topped $40 trillion and hit a record high, the US federal government may have to take measures that provoke public discontent to cope with it. The report noted that the United States currently pays about $1 trillion in interest on its national debt each year. According to forecasts by the Peterson Institute for International Economics (PIIE), without reforms to government spending or tax policy, total US debt could reach $50 trillion within six years.
Besides US Treasuries, UK government bonds also weakened further on September 28, with the 10-year gilt yield rising to 5.44%, the highest since 2007. The day's selloff also pushed 10-year government bond yields in France and Italy to multi-year highs, with French borrowing costs at their highest since 2008.
The Financial Times said other major central banks are also expected to raise rates consecutively in the coming months to curb the inflation surge triggered by the US-Iran war. Pooja Kumra, a rates strategist at TD Securities, said investors are betting that interest rates will stay high for longer. Paul Watters, head of European credit research at S&P Global Ratings, said: "We think (bond) yields are likely to grind higher from here, partly because we expect the energy price shock to persist into 2027." Watters noted that the global energy reserve "buffer is being eroded" as countries draw down their own inventories.
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