What happened: Bond yields continued to climb on Thursday as oil prices rose amid an escalating conflict in the Middle East.
The 10-year yield (^TNX), used as a benchmark for mortgage and loan rates, rose to 4.7% on Thursday, the highest level since January 2025 The 30-year yield (^TYX) climbed to 5.19%. The long-dated bond notched its longest stretch above 5% since 2007, the year prior to the financial crisis.
Why it’s important: Yields on the 10-year and 30-year remained above key psychological levels, raising concerns over mounting debt and sticky inflation as tensions between the US and Iran escalate, with the Strait of Hormuz remaining a major point of contention between the two sides.
What else you need to know: Over the past couple of weeks, investors have largely shrugged off rising oil prices as artificial intelligence became the central theme of economic and market growth.
But increasingly, investors may be anticipating that the Federal Reserve will need to tighten monetary policy, with Polymarket bettors assigning a 71% probability of a rate hike in 2026.
“That balance could become harder to maintain if Brent approaches $100 and stays there, as higher energy costs would place renewed pressure on inflation, bond yields and expectations for Federal Reserve policy,” explained Daniela Hathorn, senior market analyst at Capital.com. Brent crude (BZ=F) hovered near $86 per barrel on Thursday.
“The coming sessions will therefore test whether earnings strength can continue to offset a worsening geopolitical backdrop,” Hathorn added.
The rise in bond yields comes as worries over a Federal Reserve rate hike this year have eased, given recent softer-than-expected inflation prints.
Read more: What experts say about the possibility of rate cuts this year
However, rising oil prices threaten to reignite inflation, which could prompt the Fed to tighten policy this year.
“While the June CPI report reduced the urgency for the Fed to raise interest rates, an assessment of the broader inflation picture suggests that at least one rate hike remains the base case for this year,” the Yardeni Research team wrote in a note on Monday.
Investors are closely watching incoming economic data for clues about the outlook for inflation and monetary policy. Higher energy costs can feed through to consumer prices, potentially slowing progress toward the Fed’s 2% inflation target.
Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on X at @ines_ferre.
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