US 10-year Treasury yield nears 4.4% as oil fuels inflation fears

The U.S. 10-year Treasury yield climbed more than five basis points to 4.4006 percent, driven by a surge in oil prices that has reignited inflation concerns and pushed back expectations for central bank rate cuts.

"Yields are likely to creep higher as we lead up to the key central bank meetings this week, and as we wait to hear what happens next in the Strait of Hormuz," Kathleen Brooks, research director at XTB, said.

The benchmark yield is approaching its late-March peaks as the market grapples with a coordinated assault from rising energy prices, a stronger U.S. dollar, and shifting Federal Reserve expectations. Brent crude, the international oil benchmark, traded over $111 a barrel, its highest since the Iran war began, while West Texas Intermediate topped $100. The surge in energy costs is creating what traders are calling a "Hormuz inflation passthrough," directly impacting assets sensitive to interest rates. Spot gold fell nearly 2 percent to trade below $4,600 an ounce, and the S&P 500 was down 0.49 percent.

The move higher in yields raises the cost of borrowing for the government, corporations, and consumers, potentially slowing economic growth and pressuring equity valuations. The CME Group's FedWatch tool now shows a 99.5 percent probability of an unchanged Fed at its upcoming meeting, reflecting a dramatic repricing of rate cut expectations that has defined trading in April.

Structural Risks Amplify Volatility

Recent volatility highlights structural problems in the world's most important bond market. Total marketable U.S. Treasury debt now exceeds $30 trillion, up from roughly $10 trillion after the 2008 financial crisis, increasing the supply of securities the market must absorb.

At the same time, primary dealers are less able to provide liquidity due to post-crisis capital regulations like the Supplementary Leverage Ratio (SLR), which limits their ability to expand balance sheets. "These market events and trends highlight two structural problems in U.S. Treasury markets: the growth of Treasury issuance... and the constrained ability of bank dealers to intermediate," the Securities Industry and Financial Markets Association (SIFMA) noted in a December 2023 report.

This has led to an increasing share of trading activity being conducted by non-bank institutions, including hedge funds employing significant leverage. While these firms can enhance liquidity, their rapid unwinding of positions during market stress can amplify volatility, as seen during the March 2020 "dash for cash" that required the Federal Reserve to purchase more than $1 trillion in Treasuries to stabilize the market.

A Global Phenomenon

The sell-off in government debt is global, but the United Kingdom is facing a particularly acute shock. The yield on the 10-year gilt has climbed back above five percent, and U.K. borrowing costs have risen the most of any developed economy in the past two months.

The spread between the 10-year gilt yield and the U.S. Treasury interest rate has reached 70 basis points for only the second time since late 2025. Analysts point to a series of policy errors and the U.K.'s reliance on energy imports as reasons for its vulnerability. "Over the past decade, the UK economy has suffered a succession of policy mistakes and resulting rates of inflation which have consistently exceeded the prevailing trends across other major economies," Kallum Pickering, chief economist at Peel Hunt, wrote in a note.

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