Bond Market Alarm Sounds! Middle East Conflict Pushes Oil Prices, U.S. Treasury Yields Hit 18-Month High

Geopolitical tensions in the Middle East have escalated once again, triggering a strong rebound in international oil prices. Coupled with lower-than-expected U.S. initial jobless claims, market concerns over inflation and the Federal Reserve's potential for further rate hikes have resurged. On Thursday (23rd), U.S. Treasury yields rose across the board, with the 10-year yield breaking through 4.7%, reaching its highest level since January 2025.

The 10-year U.S. Treasury yield, a key indicator of the U.S. government's borrowing costs, climbed 5 basis points to 4.707%, marking its highest level since January 15, 2025, when it briefly touched 4.790%. The 2-year yield, more sensitive to the Fed's short-term policy, rose over 4 basis points to 4.343%, while the 30-year yield also increased by over 4 basis points to 5.188%. Bond prices move inversely to yields.

Oil prices were the primary driver behind the yield surge. Reports of a tanker attack off Saudi Arabia's coast, combined with renewed U.S. threats of expanded military strikes against Iran, heightened market fears of disruptions to Middle Eastern energy supplies.

Brent crude futures for July delivery surged 5%, rising above $99 per barrel and nearing the $100 mark once again—reaching their highest level since before the U.S. and Iran reached a ceasefire agreement last month. This rally could mark the third-largest monthly gain in the past decade. West Texas Intermediate (WTI) crude futures also climbed about 4%, surpassing $90 per barrel.

The renewed rise in energy prices could exacerbate inflationary pressures, making it harder for the Fed to pivot toward a looser monetary policy. Meanwhile, initial jobless claims in the U.S. for the week ending July 18 came in at 187,000, significantly below the 212,000 expected by economists surveyed by The Wall Street Journal, indicating continued labor market resilience and reinforcing expectations that interest rates may remain elevated or even rise further.

Investors are now turning their attention to the preliminary S&P Global U.S. Manufacturing and Services Purchasing Managers' Index (PMI) data due Friday (24th), which will provide insights into economic momentum, pricing pressures, and the Fed's future rate path.

The bond sell-off was not limited to the U.S. On Thursday, benchmark government bond yields also rose across major Asian and European markets. In the UK, newly appointed Prime Minister Andy Burnham announced a 20% reduction in business property tax rates for pubs, nightclubs, and music venues, expected to reduce government revenue by approximately £100 million (about $134 million). While aimed at helping these sectors cope with rising costs, the move deepened investor concerns over the UK's fiscal health, pushing the UK 10-year government bond yield up 4 basis points to above 5%.