Spiking oil prices jolt U.S. bond yields past 5%, threatening to set off a vicious cycle of debt just as the Fed is expected to hike rates

The benchmark 10-year Treasury yield briefly topped 5% for the first time since 2023 as spiking oil prices threaten to spill over to debt markets.

Yields later pulled back, but Monday’s milestone capped off a surge of more than 100 basis points since just before the Iran war began in late February, when the 10-year rate was below 4%.

Meanwhile, the war is now in its seventh month, and with little evidence of diplomatic progress toward fully reopening the Strait of Hormuz, crude and refined fuel products remain pricey.

In some ways, energy markets are in even worse shape than during the height of the Iran war.

While the U.S. military is guiding significant volumes of oil through the Strait of Hormuz, tanker traffic is well below prewar levels.

That means U.S. oil reserves, which are already at the lowest in over 40 years, must keep getting drained.

At the same time, Iran-backed Houthi rebels have seized control of the Bab al-Mandab Strait that has served as a vital bypass for Saudi oil to get around the Strait of Hormuz.

And a drone attack has shut down Saudi Arabia’s East-West Pipeline, which diverted much of the kingdom’s oil from the Persian Gulf to the Red Sea .

Brent crude oil prices jumped as high as 4% on Monday to nearly $110 a barrel, the highest since May.

The prospect of energy costs staying elevated indefinitely is also pushing inflation expectations up.

As a result, bond yields across Europe and Asia jumped, joining U.S.

Treasuries.

The run-up comes just as the Federal Reserve is widely expected to hike rates on Wednesday with other central banks likely to follow.

“After several years in which inflation has run above target, it has become harder for policymakers to ‘look through’ the otherwise temporary effects of higher inflation caused by supply shocks,” Neil Shearing, group chief economist at Capital Economics, said in a note on Monday.