Treasury yields have surged to their highest levels in nearly two decades as oil prices spike on fading hopes for a U.S.-Iran deal over the Strait of Hormuz. The move has pushed the S&P 500 and Nasdaq 100 lower and is splitting corporate credit markets into winners and losers.
The 10-year Treasury yield rose 0.09 percentage points to 5.27% on Monday, its highest level in nearly two decades. The 2-year yield climbed to 4.96%, a maturity that tends to track expectations for Federal Reserve policy.
Oil shock reignites the selloff
Brent crude jumped more than 4% to a high of $108.83 a barrel after President Trump rejected Iran's proposal to reopen the Strait of Hormuz, before slipping back to around $105. The energy spike is reviving inflation fears just as the Fed raised borrowing costs earlier this month for the first time since 2023. Futures markets are now betting on two more quarter-point rate rises by January, a marked shift from cuts investors had expected before oil prices took off. According to the Financial Times, Ajay Rajadhyaksha, global chair of research at Barclays, said there was "nothing magical about these yield levels" and it would take a slowdown or a hit to risk assets to reverse the selloff.
Equities and global bonds feel the pressure
The S&P 500 fell 0.5% by midday in New York as the rise in yields weighed on stocks. The Nasdaq 100 dropped 0.8% over the same session.
The pressure was not confined to the U.S. The 10-year UK gilt yield rose to 5.44%, its highest since 2007, while French and Italian 10-year yields touched fresh multiyear highs.
Credit markets split into winners and losers
Rising rates are also widening the gap between stronger and weaker borrowers, according to UBS strategist Matthew Misch. High-yield credit spreads widened to levels not seen since April, with the lowest-rated CCC bonds seeing spreads widen to 1,128 basis points from 800 over the past year. By contrast, BB-rated spreads moved to 176 basis points last week, up from 153, still below the year's peak. Misch favors utilities for their defensive cash flows and is cautious on technology, communications and CCC-rated credit.
What investors are watching next
This week brings a run of fresh U.S. data that could move yields further. The JOLTS report due Tuesday is forecast to show job openings dipping slightly to 7.24 million from 7.27 million in July, ahead of the core PCE index, quarterly GDP growth and monthly nonfarm payrolls figures later in the week.
Sources: CNBC, CNBC, Financial Times
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