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Morning Edition · Tuesday, September 29, 2026Published at 1:07 AM EDT · New York
Oil Near $107 Pushes US Yields to a 19-Year High Before Wednesday's Inflation Report
The relationship between crude oil prices and Treasury borrowing costs is the closest it has been since 1990, according to the Financial Times, and traders have increased bets that Federal Reserve Chair Kevin Warsh will raise interest rates again.
Crude oil prices rose for a second straight session, and Brent crude traded near $107 a barrel early Tuesday after President Donald Trump rejected Iran's latest proposal for a phased reopening of the Strait of Hormuz. The Israeli financial daily Globes reported that the increase followed Tehran's rejected mediation offer and renewed threats to the waterway, and that Asian equities traded mixed with more losses than gains. Trading Economics data put Brent at $106.89 at Monday's close, up 2.46 percent on the day.
Government bond yields are now moving in close step with oil prices. The Financial Times reports that the correlation between crude prices and US Treasury yields is the closest since 1990, with bond investors treating the Iran conflict as the biggest factor now moving government borrowing costs. According to CNBC, the 10-year yield sits at about 5.24 percent, its highest level in 19 years, and the 30-year yield is at its highest level since 2004. Globes described the same pattern from Tel Aviv, reporting US yields at multi-decade highs and a firmer dollar pushing the shekel to a two-month low.
Traders increased bets on further Federal Reserve tightening ahead of Wednesday's PCE price index release, according to CoinDesk's market report, which also noted that global stocks stood at a one-week low. Federal Reserve Chair Kevin Warsh delivered the Fed's first rate increase since 2023 on September 16, according to CNBC, and said summer inflation readings had not shown underlying inflation trends improving. Forecasters disagree on timing. Futures prices tracked by CNBC implied about a 64 percent chance of an October increase, while Goldman Sachs Asset Management expects the Fed to wait until December, partly because the October meeting falls close to the US midterm elections.
Part of a tracked trend
Renewed Fed Tightening Fears Rattle Global Markets
Over the next 3-6 months stronger US data revives expectations of Fed rate hikes, driving a firmer dollar, equity selloffs in export-heavy markets, and pressure on hard assets as the IMF warns of recurring economic shocks.
What this means
An energy supply shock is directly raising the term premium on US government debt, because investors are now pricing in both higher near-term inflation and a Treasury market that must fund large deficits at higher cost. The parties most exposed are leveraged borrowers rolling over debt at rates above 5 percent, emerging-market currencies facing a stronger dollar, and equity valuations built on lower discount rates. A central bank can raise the cost of credit, but it cannot produce oil, so the only response available to Warsh's Federal Reserve to an oil-driven rise in prices is to reduce demand elsewhere in the economy. The 1990 precedent cited by the Financial Times is a useful guide: the oil price spike during the Gulf crisis was followed by a recession, not by a lasting higher-inflation regime, once supply returned to normal. The likelier outcome over the next several months is that yields stay elevated and the Fed raises rates at least once more, unless the standoff over the Strait of Hormuz is resolved and crude prices fall, in which case long-term Treasury yields would likely decline faster than short-term policy rates.
What to watch
- Wednesday's release of the US PCE price index, because a core reading above 3 percent would strengthen the case for another Fed rate increase before year-end.
- Whether Iran and the United States exchange new proposals on reopening the Strait of Hormuz, since the oil risk premium is currently the largest single factor driving yields.
- Demand at upcoming long-dated Treasury auctions, which will show whether investors require even higher yields to absorb the government's new debt issuance.
Observations to monitor, not financial advice.
Synthesized from: Financial Times · Globes (Hebrew) · Globes (Hebrew) market preview · CoinDesk
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Comments
1Sep 29, 5:07 AM · edited
With crude and yields now moving together, Treasuries stop hedging equity risk, so any Hormuz de escalation should pull the 10 year yield and Brent down in the same session, a clean test of that correlation.