US 30-Year Treasury Yield Surges to 5% Amid Oil Price Increases and Rising Borrowing Costs

Treasuries Fall as Oil Prices Surge, Fueling Inflation Fears

Treasuries fell on Monday, sending 30-year yields to the highest since July, as a surge in oil prices stoked inflation fears while higher government borrowing estimates fueled concerns about increased supply. Yields climbed by at least five basis points across the curve, with 30-year rates rising as high as 5.03%. Two-year yields, which are the most sensitive to shifting expectations for the Federal Reserve's policy, climbed as much as 11 basis points to 3.99%.

The moves came amid a jump in Brent crude prices after critical energy infrastructure and tankers in the Middle East came under attack. The Treasury Department said in a statement Monday that it now estimates $189 billion in net borrowing for the April-June period, up from the $109 billion it had penciled in back in February. This significant increase in borrowing estimates has raised concerns about the potential for increased supply in the market, further pressuring bond yields.

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For bond investors, the 5% level on the 30-year yield carries special importance, with some viewing it as a "line in the sand" for the market. While moves above that level have proved short-lived over the past year, renewed tensions in the Persian Gulf and elevated oil prices suggest the pattern may not hold this time. A more persistent break above 5% or an eclipse of the 5.17% yield recorded briefly in 2023 would herald a trading range not seen in almost two decades.

Elevated prices for crude have become a principal driver of bond yields globally, altering the outlook for inflation and leading traders to abandon forecasts for Fed interest-rate cuts this year. Interest-rate swaps showed traders have priced in about a 70% chance of a Fed rate hike by April 2027. That marked a sea-change from before the Iran conflict started in late February when traders had expected a series of cuts. Economists at Barclays Plc on Monday changed their Fed forecast to just one cut by the end of next year, in March 2027, citing the outlook for energy prices.

European bonds also fell, with the German two-year yield rising as much as nine basis points to 2.73%. Traders also added to expectations of interest rate hikes by the European Central Bank this year, with a move in June fully priced and more than 80 basis points in total seen through this year.

The Fed last week kept the key benchmark rates steady in a range between 3.5% and 3.75%. However, three officials dissented over the policy statement, saying it was no longer appropriate to signal that the Fed's next move was still likely to be an interest-rate cut. New York Fed President John Williams was among the officials who have maintained their easing bias, stating that interest rates will need to come down "at some point" if inflation returns to the US central bank's 2% target.

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Bond traders are closely monitoring the Middle East turmoil and are looking ahead to the US government's announcement on Wednesday of its quarterly financing plan, in which it customarily provides guidance on the sizes of its note and bond auctions through July. Investors and strategists expect the guidance to have changed because increases may be needed sooner. Traders will also scrutinize a key labor market report on Friday, which economists expect to show that the unemployment rate held steady at 4.3% in April and that payroll growth slowed.

Nohshad Shah, head of EMEA fixed-income sales at Citadel Securities, remains optimistic that the Iran conflict is coming to an end, which will support both the fixed-income and stock market "in the short-term." However, he notes that higher oil prices, in an economy with a "robust" growth outlook, feed into broader inflationary and inflation expectations pressures, a scenario that both central banks and markets may be underestimating.