Treasury yields hit 1-year highs as oil surge reignites inflation fears

U.S. Treasury yields climbed toward one-year highs Tuesday as a resurgent oil rally, hawkish commentary from a Federal Reserve official, and the prospect of Kevin Warsh taking the helm at the central bank converged to rattle bond markets. The benchmark 10-year yield rose 6 basis points to 4.62%, nearing levels not seen since mid-2025, while the policy-sensitive two-year yield hit a 17-month high.

"The combination of an oil-driven inflation shock and uncertainty about the Fed's leadership is a potent mix for bond markets," said Michael Graham, director of research and investment strategy at Canaccord Genuity. Fed Governor Christopher Waller said the central bank may need to raise interest rates "in the near term," further lifting short-dated yields.

Brent crude surged more than 9% Monday — its biggest single-day gain since 2020 — to trade above $85 a barrel after President Donald Trump reinstated a naval blockade of the Strait of Hormuz and the U.S. military launched a third consecutive night of strikes on Iran. The 30-year Treasury yield gained 4 basis points to 5.08%, reflecting long-term inflation concerns, while the two-year yield climbed above 4.21%. Equities sold off across the board, with the S&P 500 falling 0.8% and the Nasdaq dropping 1.6% on Monday.

The moves carry high stakes for risk assets. If oil prices sustain their rally above $80 a barrel, the Fed could be forced to resume rate hikes — a scenario markets have not priced in since late 2023. Warsh, who begins his semiannual monetary policy testimony before Congress on Tuesday, is widely viewed as more hawkish than current Chair Jerome Powell, adding another layer of uncertainty to the rate path.

Oil's Return as the Inflation Wildcard

The Strait of Hormuz handles about 21% of global oil trade, and Iran's Persian Gulf Strait Authority declared passage "currently unfeasible" after the latest U.S. strikes. Brent crude has now rallied more than 20% from its recent lows, unwinding much of the relief that had helped the Indian rupee recover to near 94 per dollar. The rupee weakened to 95.62 Monday and is expected to open near 95.96, inching toward its all-time low of 96.96 hit in mid-May.

The last time oil prices triggered a comparable bond selloff was in June 2022, when Brent traded above $120 a barrel following Russia's invasion of Ukraine. The 10-year yield rose 170 basis points over the subsequent six months as the Fed delivered 300 basis points of rate hikes.

Warsh and the Fed Leadership Question

Warsh's first Humphrey-Hawkins testimony as Fed chair comes at a delicate moment. Markets are already pricing in the possibility of a rate increase after Waller's comments, and any hawkish signal from Warsh could amplify the selloff. The 10-year yield has risen roughly 40 basis points since early June, with the bulk of the move concentrated in the past week as geopolitical tensions escalated.

Gold fell 1.9% to $4,030 an ounce as the dollar strengthened on safe-haven flows, while the energy sector was the only S&P 500 group trading in the green Tuesday, with Exxon Mobil rallying alongside crude prices. Technology stocks bore the brunt of the selling, with the Nasdaq falling nearly 1% in midday trading as higher discount rates pressured growth stock valuations.

Trump formally notified Congress that the U.S. was "once more at war with Iran" in a letter dated July 10, according to a POLITICO report. The president also said he expects allied nations to reimburse the U.S. for protecting the Strait of Hormuz, proposing a 20% levy on all cargo shipped through the waterway.

This article is for informational purposes only and does not constitute investment advice.