Treasury market selling pressure intensified further on Monday, with the benchmark 10-year yield briefly climbing above 4.76% 鈥?the highest level since January 2025. The 5-year yield also reached its strongest point since early 2025, while the 30-year rate advanced approximately 5 basis points to hover near 5.26%.
As yields surged across the curve, international crude oil futures rebounded following the military clash between the US and Iran over the weekend. Brent crude briefly reclaimed the $90-per-barrel threshold, gaining nearly 4% intraday, while WTI crude rose more than 4%. This renewed energy price strength has intensified concerns over a potential inflation rebound and the possibility that the Federal Reserve could resume raising interest rates.
However, this Treasury selloff is not purely geopolitically driven. Last Friday, Fed Chair Kevin Warsh delivered clearly hawkish remarks at the Jackson Hole symposium, emphasizing that price stability remains the central bank's core mandate. Markets responded swiftly by sharply raising their expectations for a September rate hike. By Monday, federal funds futures pricing showed the probability of a September increase at roughly 64%, a significant jump from the approximately 35% level seen before Warsh's speech.
On top of all this, the renewed surge in oil prices has further reinforced the market's "inflation plus tightening" trade. Adding to the picture, the US is set to release its August employment report this week, followed by August consumer price data on September 11. These two data points will be critical in determining the Fed's policy trajectory heading into its September meeting.
Oil's Renewed Surge Delivers an Inflation Shock to Bonds
The jump in Treasury yields on Monday was directly fueled by rising energy costs. With US-Iran military tensions escalating once again, markets grew increasingly concerned about further risks to the Strait of Hormuz and broader Middle East energy supply. Brent crude climbed above $90 intraday, while WTI also advanced notably. Later in the session, WTI rose approximately 2.5% to trade near $85.50, and Brent gained roughly 2.5% to sit around $90.30.
For bond markets, the biggest challenge posed by higher oil prices is not the energy cost itself, but the potential for inflation to be reignited. Over recent months, one of the key foundations supporting rate-cut expectations has been the steady decline in inflation. However, if oil prices remain elevated due to geopolitical factors, higher gasoline, transportation, and other goods and services costs could feed through the pipeline, forcing markets to reassess the path of disinflation.
Monday's trading logic was therefore straightforward: higher oil prices lead to increased inflation risk, which boosts expectations for Fed tightening, which in turn pushes up short-end rate expectations and places downward pressure on the entire Treasury yield curve.
Sean Simko, head of fixed income investment management at SEI Investments, noted that the Fed is prepared to act if necessary. If the labor market remains stable while inflation stays elevated, the central bank could lean toward a rate hike at its September 16 policy meeting.
Warsh's Hawkish Tone Persists as September Hike Odds Climb to 64%
While oil prices ignited inflation concerns, the real catalyst reshaping rate trading came from Warsh's Jackson Hole speech on Friday. In his remarks, Warsh stressed that the Fed must place restoring price stability at the core of its mandate and reaffirmed the 2% inflation target. Markets interpreted this as clearly hawkish, particularly following the dissenting vote in favor of a rate hike at the July meeting. Investors are now recalibrating their expectations for the remainder of the year.
The policy-sensitive 2-year Treasury yield surged approximately 11.8 basis points on Friday alone. It dipped briefly in early Monday trading but subsequently climbed back to around 4.337%.
More notably, market conversations have shifted from debating whether the Fed will cut rates in September to whether it might actually raise them. According to Reuters, federal funds futures showed the probability of a September hike jumping to 64% by Monday, up from roughly 35% before Warsh's speech. His comments have even prompted economists at Barclays and Societe Generale to begin forecasting September and December hikes, scenarios that were not previously part of their base cases.
In other words, markets are undergoing a rapid repricing of the rate trajectory: shifting from anticipation of Fed easing to concern over renewed tightening. Whether these expectations hold ultimately depends on the data. The August nonfarm payrolls report arrives this Friday, and the August CPI reading follows on September 11. Together, these indicators correspond to the Fed's dual mandate of employment and inflation and will directly shape the final pricing ahead of the September 16 meeting.
Long-End Bonds Face Additional Pressure: Supply and Term Premium
While the 2-year yield primarily reflects Fed policy expectations, the persistent climb in 10-year and 30-year Treasury yields indicates that market concerns have now spread to longer maturities. On Monday, the 10-year yield touched 4.764%, its highest level since January 2025, while the 30-year yield advanced about 5 basis points to near 5.26%.
It is worth noting that although the 30-year yield continued its advance, it remains some distance from the multi-year highs it reached in mid-August. Earlier, the US Treasury announced an expansion of its long-dated bond buyback program to improve market liquidity and valuation in those securities, which had helped suppress the 30-year yield at that time.
This suggests that the current pressure on the long end cannot be attributed solely to the Fed. On the one hand, the US fiscal deficit and Treasury supply remain structural issues that the long-dated bond market cannot ignore. On the other hand, investors' growing demand for higher term premia to hold long-duration Treasuries could become another significant factor pushing up 10-year and 30-year yields.
Mark Spindel, chief investment officer at Potomac River Capital, pointed out that future bond supply deserves particular attention, including the corporate bond market. September has historically been the peak issuance season for US investment-grade corporate debt, and new supply could further absorb market liquidity, especially given that the inflation outlook has not shown clear improvement.
As a result, the Treasury market is currently facing multiple simultaneous pressures: a more hawkish Fed, rising inflation risks, government bond supply, and corporate debt issuance.
Global Long-End Yields Move Higher in Tandem
The rise in US Treasury yields has also rippled across global bond markets. According to reports, Germany's 10-year yield climbed to 3.313% on Monday, its highest level since 2011. Japan's 2-year yield also reached its loftiest point in 31 years, while Germany's 2-year yield rose to its highest level since July 2024.
This illustrates that global bond markets are not merely responding to a singular "Fed trade." Rising energy prices are rekindling global inflation risks, expectations for rate cuts among major central banks are being suppressed, and combined with fiscal expansion and increased government bond supply, long-end yields are facing upward pressure across the board.
For the United States, the 10-year Treasury yield breaking above 4.75% deserves particular attention. It signals not only higher financing costs but also broader implications for the borrowing expenses of the US government, corporations, and households over the long term.
The Bond Market's Next Test: Can Jobs and CPI Data Interrupt This Yield Rally?
Going forward, the key question for markets is whether this Treasury yield surge represents a temporary adjustment driven by geopolitical events and policy expectations, or the beginning of a new, higher rate equilibrium.
In the near term, much will depend on Friday's US employment data. If the labor market continues to show resilience and inflation data does not cool meaningfully, Warsh's hawkish signal could be validated by the economic figures. In that scenario, the probability of a September Fed hike could rise further, and Treasury yields may continue climbing in search of a new equilibrium.
Conversely, if the labor market deteriorates noticeably, markets may begin questioning whether the Fed can afford to hike while economic growth is under pressure. Such concerns have already emerged: should the August jobs report again show significant cooling in the labor market, the Fed could be forced to hold off on rate increases.
Meanwhile, long-dated Treasuries also face the temporary disruption of month-end index rebalancing. Because the US Treasury issued a substantial volume of 10- to 30-year bonds in August, these securities will be added to bond indices at month-end, potentially generating passive buying demand that could partially cushion further upside in long-end yields.
But over a longer horizon, markets are confronting an increasingly clear question: if inflation stubbornly refuses to return to 2% while US fiscal financing needs remain persistently elevated, is the current 10-year yield around 4.75% still a cyclical high, or is it the new structural level?
For now, oil prices, Warsh's hawkish stance, and the upcoming employment and inflation data are jointly forcing investors to confront this very question.
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