Treasury yields advance as oil fuels Fed hike bets

US Treasury yields climbed on Wednesday as oil prices pushed above $100 a barrel, intensifying concern that higher energy costs could keep inflation elevated and persuade the Federal Reserve to raise interest rates at its September 15-16 meeting.

The benchmark 10-year Treasury yield moved above 4.8%, touching its highest level since late 2023, while longer-dated yields remained under pressure as investors reassessed the inflation outlook and the likely path of monetary policy. Bond prices move inversely to yields.

Brent crude rose past $100 a barrel for the first time in six weeks as fighting involving the United States and Iran escalated and attacks on Saudi energy facilities deepened fears of further supply disruptions across the Gulf. The oil rally has revived concern that energy costs could feed through to transport, production and consumer prices just as the Fed assesses whether inflation is cooling sufficiently.

Interest-rate futures showed traders assigning roughly a 60% probability to a quarter-point increase at next week’s Federal Open Market Committee meeting. That represents a sharp shift from earlier expectations that the central bank would leave borrowing costs unchanged.

The move in market pricing has widened the gap between traders and many economists. A majority of economists surveyed this week still expect the Fed to keep its target range at 3.50% to 3.75% at the September meeting and through the end of the year, although confidence in that forecast has weakened as economic data remain firm and inflation risks build.

Investors are now focused on producer and consumer inflation reports due later this week. The figures are expected to carry unusual weight because the Fed has offered limited guidance on the next policy step and officials have signalled differing views about the balance between persistent price pressures and the risk of overtightening.

Market-based inflation expectations also strengthened materially as crude advanced, adding to pressure on nominal yields. The 10-year inflation-protected Treasury yield remained above 2.4%, underscoring that both real borrowing costs and inflation compensation are elevated.

The rise in Treasury yields has already fed into borrowing costs elsewhere in the economy. The average rate on a 30-year fixed US mortgage rose six basis points to 6.85% in the week ended September 4, its highest level since June 2025, according to the Mortgage Bankers Association. Refinancing applications fell 6.2% from the previous week and overall mortgage applications declined 2.7%.

Longer-term yields are also being shaped by concerns beyond oil and monetary policy. Investors have been watching the expansion of federal debt, which moved above $40 trillion in August, as well as heavy capital demand linked to investment in artificial-intelligence infrastructure. Those pressures have complicated the Treasury market’s response to expectations for Fed policy.

The Treasury Department on Wednesday announced that it would buy back up to $6 billion of 10- to 20-year securities on September 10, three times the size of its previous long-dated buyback operation. The programme is intended to support liquidity in older, less actively traded securities rather than alter the government’s overall borrowing needs.

The announcement did little to reverse the broader rise in yields. The 10-year yield reached about 4.85% after the buyback details were released, while the 30-year sector remained sensitive to concerns over supply, inflation and the longer-term fiscal outlook.

Oil’s move above $100 also weighed on equities and reinforced a broader global shift towards tighter-policy expectations. US shares slipped as investors weighed the prospect of higher input costs against gains in energy producers. The dollar weakened modestly, while the yen strengthened as markets also priced a higher probability of a Bank of Japan rate increase.

Fed policymakers face a difficult combination of strong activity, inflation still above the central bank’s 2% objective and a new energy-price shock. Chairman Kevin Warsh has provided little explicit forward guidance, leaving markets more dependent on incoming data and public comments from individual officials.