US Treasury Yields Rise Amid Inflation Fears from Surging Oil Prices

On September 9, US Treasury prices experienced a significant decline as surging oil prices reignited inflation concerns among traders. The two-year yield climbed to 4.42%, marking a 3 basis point increase and its highest level since July 2024. Meanwhile, the ten-year yield remained close to 4.81%. The primary driver of this market movement was the price of crude oil, which briefly exceeded $100 per barrel for the first time since July, while West Texas Intermediate approached $95. This sharp increase followed US airstrikes on Iranian oil tankers, escalating tensions in the Middle East and raising fears of constrained global oil supply.

This recent spike in oil prices is not an isolated incident; earlier in March, crude oil prices surged to $126 per barrel before retreating as diplomatic efforts temporarily eased tensions. That earlier spike had already pushed inflation expectations higher, complicating the Federal Reserve's messaging for several months. The current surge in oil prices comes just ahead of the Federal Open Market Committee (FOMC) meeting scheduled for September.

In response to the rising oil prices, traders have begun to increase the likelihood of a Federal Reserve rate hike. Fed Chair Kevin Warsh has emphasized that controlling inflation remains the central bank's top priority. He also noted that inflationary pressures extend beyond oil, as tariffs continue to elevate import costs across various categories, and the growing demand for artificial intelligence infrastructure adds further upward pressure on prices.

The two-year yield is particularly sensitive to anticipated changes in Fed policy, reflecting traders' expectations for short-term interest rates over the next two years. Its rise to 4.42% indicates that the market is pricing in tighter monetary policy rather than a loosening of rates. With the two-year yield at 4.42% and the ten-year yield at 4.81%, the yield curve is positively sloped by approximately 39 basis points.

The US airstrikes on Iranian oil tankers represent a significant escalation that could have lasting effects on oil prices. Iran is a major oil producer, and any sustained disruption to its exports or to shipping routes through the Strait of Hormuz could keep crude prices elevated for an extended period. The March spike to $126 per barrel demonstrated how quickly prices can rise when supply disruptions coincide with steady demand. Although prices retreated from that peak, they did not return to the sub-$80 levels seen during much of late 2024.

The upcoming FOMC meeting in September will be a critical moment for the markets. If Warsh and his colleagues indicate that a rate hike is being considered, the selloff in Treasury securities could intensify further.