Treasury yields hit 19-year high as oil tops $107 on Saudi strikes

Rising borrowing costs and energy prices are tightening financial conditions for households and companies just as the Federal Reserve prepares to decide on interest rates. The 10-year Treasury yield reached 5.02 percent on Tuesday, its highest level since 2007, while Brent crude climbed above $107 a barrel after attacks on Saudi infrastructure. Markets now assign a 92 to 93 percent probability of a quarter-point Fed rate increase this week.

The yield move followed a surge in oil that began with Houthi missile and drone strikes on a Saudi air base and damage to the kingdom’s East-West pipeline. Brent futures rose 1.58 percent to $107.35 and WTI futures gained 2.11 percent to $103.53. Goldman Sachs noted the pipeline outage could threaten up to 4 percent of global supply and raised the chance that Brent could exceed $120 if Gulf output stays depressed. Vessel traffic through the Strait of Hormuz fell sharply, according to Kpler data.

A BofA survey released Tuesday showed global fund managers cutting equity exposure, with the share overweight stocks falling to 49 percent from 56 percent and cash holdings rising to 3.9 percent. The one-month correlation between WTI crude and the 10-year yield reached 0.96, the highest since 2019, according to BMO Capital Markets. Analysts at Standard Chartered and Interactive Brokers said the link transmits higher energy costs directly into inflation expectations and borrowing rates.

The 30-year Treasury yield rose to 5.368 percent and the two-year note yield reached 4.648 percent. Mortgage rates, auto loans and corporate financing costs move with these benchmarks. Consumer spending faces pressure from both higher gasoline prices and elevated debt-service costs, said Andy Lipow of Lipow Oil Associates.

The Federal Open Market Committee begins its two-day meeting Tuesday. CME FedWatch data and economist comments indicate traders expect the first rate increase in more than three years, with further hikes possible if oil remains elevated. Germany’s 10-year yield also hit a multi-year high above 3.5 percent, and Japan’s 10-year yield breached 3 percent again this month.