U.S. long-term Treasury bonds came under renewed pressure this week, with the 10-year yield rising to 4.92% on Thursday, hitting its highest level since 2023 and coming just one step away from the closely watched 5% threshold on Wall Street. As the Iran conflict pushes oil prices higher, markets are repricing for more persistent inflation risks, increasing the likelihood of a Fed rate hike next week.
Oil prices rise amid heightened supply shocks
Fortune, citing multiple economists, said that over the past few years, repeated supply shocks—such as wars, tariffs, crop failures, and disrupted shipping—have led businesses and households to gradually form expectations about price volatility. Today, these expectations are beginning to show more clearly in the bond market.
The U.S. Treasury Secretary's efforts to stabilize the bond market have failed to curb the rise in long-term yields. Meanwhile, international oil prices have rebounded above $100 per barrel, intensifying market concerns about energy costs being passed on to broader prices.
Expectations for rate hikes are rising rapidly
Interest rate futures indicate that the market currently estimates a roughly 75% probability of a Fed rate hike next week. The report notes that investors are no longer waiting for clearer signals from the Fed but are instead preemptively pricing in higher inflation and interest rate paths by selling long-term Treasury bonds.
Some economists argue that this debt-market-driven tightening could itself amplify the problem. If investors begin to doubt the Federal Reserve’s commitment to controlling inflation, long-term bonds may demand higher risk premiums, pushing yields even higher.
- The 10-year U.S. Treasury yield rose to 4.92%.
- The market expects a 75% probability of an interest rate hike next week.
- International oil prices return above $100 per barrel.
The August PPI components remained relatively strong.
The market is currently focused on the upcoming release of the U.S. Consumer Price Index. However, the August Producer Price Index, released on Thursday, has already eased some pressure. Data showed that the August PPI rose 0.4% month-over-month and 5.4% year-over-year, in line with market expectations, though some components still showed elevated increases.
Among these, diesel prices rose 24.1% year-over-year, heating oil and distillates increased 22.8%, and egg prices surged 32.2%. Some economists believe that such cost increases are difficult for businesses to fully absorb and may continue to be passed through to the CPI and the PCE index, which the Fed closely monitors.
Some argue that the individual components of the PPI are insufficient to justify an immediate rate hike. Economists at Oxford Economics estimate that the corresponding monthly increase in core PCE could be as low as 0.15%, a level too modest to trigger a policy shift.
The market tests the Fed's credibility
The report suggests that the current issue is no longer just about the strength or weakness of a single month’s inflation data, but rather a reassessment by the market of the Fed’s policy credibility. If the Fed attempts to let the bond market do more of the tightening on its own, investors may continue testing how high long-term yields Washington is willing to tolerate.
Under this backdrop, volatility in the bond market is no longer confined to interest rate trading alone but is increasingly spilling over into broader asset pricing. Next, U.S. inflation data and the outcome of the Federal Reserve meeting will be key indicators in determining whether long-term yields move closer to 5%.