US government borrowing costs climbed to their highest level since 2007 after a jump in oil prices further fuelled concerns about inflation. The effective interest rate on US government bonds over 10 years, known as the 10-year Treasury yield, rose as high as 5.04% but has eased back since. Government bond yields have been rising globally for months, driven by worries that inflation caused by the oil price surge since the start of the US-Israel war with Iran will lead to higher interest rates. The US has been buying back bonds back in a bid to drive the Treasury yield down, with Treasury Secretary Scott Bessent calling the intervention “successful”.
The global benchmark wholesale oil price rose to over $109 a barrel on Tuesday, up from around $86 at the end of August, after renewed concerns about Saudi Arabia’s ability to export oil following rising tensions in the region. Investors are anticipating the US Federal Reserve Chair Kevin Warsh will raise interest rates to combat the inflation caused by higher oil prices. However, US President Donald Trump opposes a rate hike, having long argued lower rates are great for boosting the economy. He fell out with Warsh’s predecessor Jerome Powell over his decision not to cut rates.
Higher interest rates and inflation tend to drive up the yields bond investors demand on government borrowing. Bond yields can also be a sign of how much faith investors have in a given government, with a higher yield reflecting less confidence. Competition for debt from artificial intelligence (AI) firms is also driving up yields. Tech giants are borrowing massive piles of cash to build huge data centres.
This raises interest rates on tech firm’s debt which increases government bond yields in response. Carol Schleif, chief market strategist at BMO Wealth Management, said bond markets had been signalling for weeks that higher interest rates may be needed. While the rise in borrowing costs has been “orderly” this year, rather than sudden, she said rates could remain elevated if geopolitical tensions and high energy prices remain “front and center”. Satellite image reveals major damage that shut crucial Saudi oil pipeline Faisal Islam: Why bond market wildfire is keeping world leaders up at night
