10-year Treasury yield retreats to 4.693% as oil surge fuels rate-hike bets

US Treasury yields edged lower Friday but held near multi-year highs as Brent crude's rally above $100 a barrel reinforced expectations the Federal Reserve will resume raising interest rates.

The 10-year yield slipped 1 basis point to 4.693% after touching 4.7% Thursday, its highest since January 2025, as surging energy costs and a resilient labor market pushed traders to price in a July rate hike.

"The bond market is repricing for a more aggressive Fed because the inflation impulse from higher oil is too large to ignore, especially with jobless claims at record lows," said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.

Two-year yields, more sensitive to monetary policy expectations, rose for a sixth straight session to 4.37%. Swap markets now assign a 35% probability of a rate increase at the Fed's July 28-29 meeting, up from 10% last week, with a September hike fully priced in at 77% per the CME FedWatch Tool. Brent crude climbed above $100 a barrel for the first time since May after Iran-aligned Houthi rebels claimed attacks on Saudi oil tankers, extending a rally that has pushed the benchmark up roughly 35% this month.

The yield surge tightens financial conditions at a time when the 10-year's rise above 4.5% has already pushed the average 30-year mortgage rate to 6.58%, its highest in nearly a year. Analysts at Wells Fargo said the 10-year could settle into a higher long-term range of 4.5% to 5.0% if energy costs remain elevated and the economy continues to generate strong payroll growth.

The retreat in yields Friday was marginal, leaving the benchmark within striking distance of levels that have historically preceded broader equity selloffs. The Nasdaq Composite fell 2.15% Thursday after disappointing capital expenditure disclosures from Alphabet and Tesla, while the S&P 500 declined as megacap technology stocks absorbed the dual shock of higher discount rates and stretched AI spending plans.

Fed Chairman Kevin Warsh's shift away from providing explicit forward guidance has amplified uncertainty around the rate path. The central bank has kept its benchmark rate unchanged since July 2023, but the combination of sticky inflation — reinforced by energy-driven price pressures — and a labor market that continues to generate sub-4% unemployment has eroded the case for patience.

The last time the 10-year yield traded above 4.7% was in January 2025, when markets were pricing a similar rate-hike cycle. That episode saw the S&P 500 fall 6% over the following six weeks before the Fed signaled a pause, underscoring how sensitive equity valuations have become to the direction of long-term rates.

Oil's Spillover Into Rates

War risk insurance costs for ships transiting the southern Red Sea more than doubled after the Houthi attacks, with premiums rising above 1% of vessel value from around 0.3% last week, according to shipping sources. The escalation threatens to keep oil prices elevated for longer, sustaining the inflation headwind that has driven the repricing in rate expectations.

The Treasury's $21 billion auction of 10-year Inflation-Protected Securities this week drew the highest awarded yield since 2008, reflecting investor demand for protection against sustained price pressures. The auction result, combined with the surge in nominal yields, signals that bond investors are bracing for a regime of higher-for-longer interest rates even as the conflict in the Middle East injects fresh uncertainty into the outlook.

This article is for informational purposes only and does not constitute investment advice.