Brent crude rose to 108 dollars a barrel in Monday trading, while the yield on 10-year US Treasuries climbed to 5.23%, one of its highest levels since 2007, as hopes faded that Tehran and Washington would reach an agreement to reopen the Strait of Hormuz and concerns about global inflation intensified.
Brent crude extended its gains for a second consecutive day, trading at 107.2 dollars a barrel, up 1.84% from Monday’s close. Selling pressure on US Treasuries pushed the 10-year yield up by 0.05 percentage points, while the 20-year yield surpassed 5.5%, approaching levels last recorded in 2004.
Selling wave puts pressure on global bonds
The bond sell-off spread to other major markets, with the yield on 10-year UK government bonds rising to 5.42%, near its highest level since 2008, while the German yield climbed to 3.65%, its highest since 2009. In Japan, the yield on two-year government bonds reached 1.98%, after remaining below 2% since 1995.
Higher energy prices put pressure on bonds by boosting inflation expectations and prompting tighter monetary policy, while also increasing government spending and the need for additional borrowing. Selling drives bond prices lower and yields higher because of the inverse relationship between price and yield.
For example, if a bond is priced at 100 dollars and pays a fixed 5% interest, or five dollars, a decline in its trading price to 90 dollars while the interest remains at five dollars raises the effective yield to about 5.6%.
Oil fuels expectations of tighter monetary policy
Rising oil prices increase production and transportation costs across various sectors of the economy, pushing up the overall price level and strengthening expectations of higher interest rates from the US Federal Reserve, the Bank of England and other major central banks.
The Federal Reserve, chaired by Kevin Warsh, raised its interest rate by a quarter point at its latest meeting in September, to a range of 3.75% to 4%, for the first time since 2023. Market expectations strengthened for three additional increases by the end of 2027, while another estimate points to the possibility of two rate increases, each by a quarter point, before the end of next January.
In a speech in September, Warsh said inflation remained above the Federal Reserve’s 2% target, while the US labor market remained in good shape. Expectations of a more restrictive monetary policy led to a sharp rise in short-term interest rates, narrowing the spread between the yields on two-year and 10-year Treasuries to just 17 basis points last week, the narrowest gap since early 2025.
The Federal Reserve’s continued hawkish messaging, along with oil prices remaining above 100 dollars, are key factors affecting the bond market.
US Treasury Secretary Scott Bessent, meanwhile, called on the Federal Reserve to approach interest rates with an “open mind,” arguing that productivity gains from artificial intelligence applications and deregulation could help curb inflation. US President Donald Trump has also repeatedly called for lower interest rates, as mortgage and personal loan costs, along with higher diesel and gasoline prices, affect Americans’ cost of living ahead of the congressional midterm elections next November.
Public debt increases borrowing needs
Energy-driven inflation increases government spending on education, healthcare, defense and social assistance programs, raising borrowing needs. Traders are demanding higher yields as debt risks mount, particularly in the United States, where public debt has exceeded about 40 trillion dollars, according to US Treasury Department data.
In France, public debt has risen by more than 1 trillion euros (1.14 trillion dollars) since President Emmanuel Macron took office in 2017, when it was equivalent to about 98% of gross domestic product. Official forecasts indicate that the ratio will rise from 118% of gross domestic product to more than 130% by 2030.
In Britain, public debt has exceeded 3 trillion pounds sterling (about 4 trillion dollars), putting pressure on the government’s ability to support social and healthcare services as financing costs rise.
Artificial intelligence financing intensifies competition for capital
Ekaterina Bigos, chief market strategist at BNP Paribas Asset Management, said selling pressure in global bond markets was partly due to increased issuance by major technology companies to finance artificial intelligence infrastructure, creating a situation of “competition for capital” in global markets.
Concerns have grown that higher oil and gas prices following the outbreak of the war in Iran could raise the operating and maintenance costs of data centers, which require large amounts of energy to run servers and provide the storage capacity needed for artificial intelligence applications, potentially weighing on technology companies’ expected profits.
Major US technology companies spent 450 billion dollars on infrastructure last year, with a large share allocated to artificial intelligence technologies. Spending is expected to reach 900 billion dollars this year and 1.4 trillion dollars in 2027, while companies borrowed about 400 billion dollars during 2026 to fund their artificial intelligence activities, adding pressure to global bond markets.
