Spiking oil prices jolt U.S. bond yields past 5%, threatening to set off a vicious cycle of debt just as the Fed is expected to hike rates

For the first time since 2023, the 10-year Treasury yield briefly surpassed 5%, marking a surge of over 100 basis points since tensions in the Iran war began in late February. This spike was driven by surging oil prices, which have remained high despite the U.S. military's efforts to maintain oil flow through the Strait of Hormuz.

Iran-backed Houthi rebels have taken control of the Bab al-Mandab Strait, further disrupting oil shipments from Saudi Arabia. Brent crude oil prices soared to nearly $110 a barrel, the highest since May, and energy costs are expected to stay elevated. This has pushed inflation expectations up, causing bond yields worldwide to rise, including in Europe and Asia.

The Federal Reserve is expected to raise rates on Wednesday, joining other central banks. Neil Shearing, group chief economist at Capital Economics, warned that a cycle of rising yields could exacerbate fiscal concerns, as high public debt and deficits make interest rate hikes more damaging. While nominal GDP growth currently outpaces debt servicing costs, Sharma, chairman of Rockefeller International, cautioned that the AI boom could be affected by rising borrowing costs, as debt-servicing expenses climb and investors become more hesitant to fund such ventures.