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

The benchmark 10-year US Treasury yield climbed to 5.02 percent on Tuesday, its highest level since 2007, as surging oil prices fueled expectations that the Federal Reserve will raise interest rates again to combat inflation. Traders pointed to fresh disruptions in global energy supplies tied to the ongoing US-backed campaign against Iran and related attacks by Houthi forces in Yemen.

Brent crude futures rose more than 1.5 percent to above 107 dollars a barrel, while West Texas Intermediate crude traded near 103 dollars. The gains followed reports that Iran-backed Houthis struck Saudi Arabian military sites on Monday and that a key Saudi East-West pipeline had been damaged, forcing its closure. The pipeline normally allows exports to bypass the Strait of Hormuz, through which roughly a fifth of global oil once flowed. Iran’s military also claimed strikes on vessels in the Gulf, adding to supply concerns that have pushed prices above 100 dollars for the first time in months.

The 10-year yield’s move higher directly affects borrowing costs across the economy. Mortgage rates, auto loans and corporate debt all track the benchmark closely. Germany’s equivalent bond yield reached 3.55 percent, its highest since 2009, while Japan’s 10-year note briefly topped 3 percent for the second time this month. Analysts at Mitsubishi UFJ Bank warned that persistent crude prices would keep inflationary pressures elevated and force central banks to maintain tighter policy.

Markets now price in a greater than 92 percent chance of a quarter-point Fed rate increase at this week’s policy meeting, according to CME FedWatch data. August inflation figures already sit well above the central bank’s 2 percent target, and higher energy costs threaten to push readings further upward. The one-month correlation between West Texas Intermediate prices and the 10-year yield has reached 0.96, the strongest since 2019, meaning oil shocks transmit almost immediately into tighter financial conditions.

Fund managers have begun pulling back from equities in response. A BofA survey released Tuesday showed the share of global managers overweight stocks fell to 49 percent from 56 percent last month, while cash holdings rose to 3.9 percent. A disorderly bond selloff now ranks as the top perceived market risk. Stock futures pointed lower ahead of the Fed decision, with the Dow and S&P 500 contracts each down about 0.2 percent.

The economic fallout arrives as the US continues its military operations against Iran, which Washington says are aimed at curbing Tehran’s nuclear ambitions and regional influence. Critics note that the same policies have contributed to sustained high energy prices that ultimately burden American households through elevated borrowing costs and living expenses. Saudi Arabia, a key US partner, faces mounting pressure on its oil infrastructure, raising the prospect of prolonged supply tightness.

Central bankers face a narrowing set of options. Further rate hikes risk slowing growth at a time when geopolitical tensions already weigh on confidence. Yet allowing inflation to accelerate carries its own political costs. The interplay between Middle East instability and domestic financial markets has grown tighter than at any point in recent years, leaving little room for error in policy responses.