US 10-Year Yield Hits 19-Year High as Oil Surge Firms Fed Rate Hike Bets

The benchmark US 10-year Treasury yield surged to its highest level in 19 years on Tuesday, reaching 5.041% before settling around 5%, as a spike in oil prices and escalating Middle East tensions reinforced expectations that the Federal Reserve will raise interest rates this week for the first time in over three years.

The yield on the 30-year Treasury bond jumped to 5.368%, its highest since 2007, while the 2-year yield rose to 4.665%, according to multiple reports. Bond yields move inversely to prices, and the sharp rise reflects growing investor concern that war-related energy inflation will force central banks to keep borrowing costs higher for longer.

Oil prices extended their rally, with Brent crude settling up 2.9% at $108.76 a barrel and West Texas Intermediate rising 4.4%. Diesel futures closed at a record high, and the US national average diesel price hit a fresh record of $6.27 a gallon, up from $6.23 the previous day. Gasoline averaged $4.33 a gallon. The gains follow attacks on Saudi Arabian energy infrastructure and a warning from Libya that it may declare force majeure after protests disrupted oil production.

"The market has yet to see a catalyst that could reverse the recent momentum in yields," Jim Barnes, director of fixed income at Bryn Mawr Trust, told Reuters. "Any inflation data that we've had, any news out of events that are happening overseas for the geopolitical concerns, anything that's budget-related outside the U.S. or in the U.S., everything keeps pointing in the same direction."

The Federal Reserve opened its two-day policy meeting Tuesday and is widely expected to announce a 25-basis-point increase to its benchmark rate, bringing it to a range of 3.75% to 4%. According to CME’s FedWatch tool, financial markets had priced in a 94.5% likelihood of a hike as of Tuesday, up from 33.1% one month ago.

Morgan Stanley and Goldman Sachs abandoned their forecasts for the Fed to hold rates steady, instead predicting a hike Wednesday and at least one more later this year. Bank of America expects 75 basis points of hikes in 2026, according to a Reuters report.

Higher energy prices are strengthening expectations that central banks will need to keep rates elevated to contain inflation. US inflation reached a three-year high of 4.2% in May before easing to 3.4% in July and August. War-related price pressures are now seeping into broader parts of the economy.

The yield surge dragged US stocks lower. The Dow Jones Industrial Average fell 328.09 points, or 0.63%, to 52,093.11. The S&P 500 lost 34.25 points, or 0.45%, to 7,585.73. The Nasdaq Composite dropped 204.84 points, or 0.78%, to 25,981.57. Declining issues outnumbered advancers by a 2.56-to-1 ratio on the NYSE and 2.33-to-1 on the Nasdaq. The energy sector was the only major S&P 500 gainer, advancing 2.3% on higher crude prices.

The Philadelphia SE Semiconductor index eked out a 0.4% gain after Monday’s rout, as fears over AI’s destructive potential and growing opposition to data-center construction weighed on tech stocks. Shares in Micron and Intel slipped 0.4% and 0.3%, respectively.

Treasury Secretary Scott Bessent told Congress on Tuesday that the US government’s massive bond buyback program, tripled in August to $6 billion from $2 billion, had proven successful. He called the operations “the two most successful treasury auctions that we’ve had in 20 years” and said the US bond market has been “the best-performing bond market in the developing world” since President Donald Trump took office.

The rising yields present a challenge for Fed Chair Kevin Warsh, who took the helm in May. Trump has long argued for lower rates and has opposed a hike, according to reports. Under Warsh, dissent has been deepening at the central bank, with some policymakers already pushing for a rate increase. National Economic Council Director Kevin Hassett told CNBC on Tuesday that he believes there are signs inflation is cooling, but added that the administration respects the Fed’s decision.

“This will probably be not a one-and-done, but a series of rate increases,” said Paul Nolte, senior wealth adviser and market strategist at Murphy & Sylvest. “It will be dependent on oil; that is really the source of inflation and it’s starting to seep into other parts of the market.”

Market participants noted that competition for debt from AI firms, which are borrowing heavily to build data centers, is also driving yields higher. The Treasury is set to auction $13 billion of 20-year bonds on Tuesday, adding fresh supply to a market already under upward pressure.

The 10-year inflation breakeven rate stood at 2.377%, suggesting investors expect inflation to average about 2.4% annually over the next decade.