Oil Spike Above $108 Drives US Bond Yields to 2007 Highs

Key points

• Brent crude rose over 3% to $108.27 per barrel after Trump rejected Iran’s offer to reopen the Strait of Hormuz.
• US 10-year Treasury yields increased by 0.05 percentage points to 5.23%, marking the highest level since 2007.
• The 2-year US Treasury yield rose to 4.92%, reflecting heightened expectations for future interest rate hikes.
• Japanese 2-year government bond yields hit 1.98%, a level not reached since 1995, following Bank of Japan meeting minutes.
• Futures markets now anticipate two additional 25-basis-point Federal Reserve rate increases by January, a shift from prior expectations of cuts.
• S&P 500 and Nasdaq 100 futures declined by 0.5% and 1.1% respectively amid the bond market turmoil.

Background

This escalation follows a series of Middle East tensions that began in early September 2026, when US-Iran strikes pushed oil prices above $100 and triggered a global bond selloff. By mid-September, the 30-year US Treasury yield had approached 5.38%, its highest in two decades, while mortgage rates climbed to 6.87%. The current surge in oil prices and bond yields represents a continuation of this trend, with investors increasingly pricing in persistent inflation and stronger economic growth, leading to a reversal of expectations for Federal Reserve rate cuts.

Why it matters

The sharp rise in oil prices and government bond yields signals a significant shift in global financial conditions, with implications for inflation, monetary policy, and economic growth. Higher borrowing costs could pressure consumer spending and business investment, while the Federal Reserve’s potential pivot to further rate hikes may tighten financial conditions globally. The situation also highlights the vulnerability of energy markets to geopolitical disruptions, particularly in the Strait of Hormuz, and the interconnectedness of oil prices, bond yields, and equity markets.

What to watch

Investors will closely monitor developments in US-Iran negotiations and any further moves in oil prices, as well as upcoming inflation data and Federal Reserve communications. The Bank of Japan’s potential response to rising bond yields and inflation expectations will also be watched, as will the impact of higher borrowing costs on consumer and business sectors. Additionally, the Federal Reserve’s decision on future rate hikes will be a key focus, with markets currently pricing in two additional increases by January.