US government borrowing costs have risen to 5% for the first time since 2023 as soaring oil prices fueled by the war in the Middle East trigger an intensifying sell-off in the global bond market.
The yield on 10-year US Treasury bonds hit the psychologically important threshold on Monday, on a day of renewed selling pressure on Wall Street as the global oil price reached $108 a barrel. With traders awaiting a crunch Federal Reserve interest rate decision on Wednesday, the benchmark rate has steadily climbed from a low this year of 4% before the outbreak of the US-Israeli war on Iran in late February.
The Oil Price Spike
Brent crude, the international benchmark for oil prices, surged to more than $108.5 a barrel on Monday — a 3.7% increase on the day. The spike came after Yemen’s Iran-aligned Houthi forces launched several attacks against Saudi Arabia and captured the strategic island of Perim in the Bab al-Mandab strait on Sunday, expanding their control of the waterway.
The rise was also fueled by the Gulf states postponing a meeting with Tehran to discuss creating a temporary shipping lane through the Strait of Hormuz, a vital channel through which a fifth of the world’s oil and gas supply normally passes.
Traders in the kingdom have warned it will run out of oil stocks for export if it does not reopen the east-west pipeline within days. Gas prices also climbed higher on Monday, with the UK benchmark rising by 5% to 208.73p a therm — its highest level since December 2022.
The Bond Market Reaction
With fears mounting as the Middle East war escalates, bond markets have come under intense selling pressure. The US 10-year Treasury yield is used in global financial markets as a benchmark for pricing other assets, meaning a jump in borrowing costs for Washington has consequences for countries, businesses, and households worldwide.
Borrowing costs also rose across Europe on Monday, including a rise in 30-year UK government yields to the highest level since March 1998. The moves come as traders await decisions on interest rates from the US Federal Reserve on Wednesday and the Bank of England on Thursday after the European Central Bank raised borrowing costs last week.
The Inflation Risk
With wholesale energy prices on the rise, the cost of petrol and diesel hit new Iran war highs on Monday, according to the RAC, with the average cost of petrol climbing to 169.68p and diesel hitting 191.68p.
The US-Israeli war with Iran has disrupted oil and gas supply across the Middle East this year, sending the oil price soaring from its prewar level of about $72 a barrel to peak at $126 in April. Brent crude later fell back over the summer amid hopes of a lasting ceasefire, before starting to climb again after the memorandum of understanding between the US and Iran fell apart.
The Outlook
Chris Beauchamp, of the broker IG, said a “move back to the spring highs” looked increasingly likely. “Oil markets are being subjected to their worst fears all at once — attacks on energy infrastructure, the closure of Hormuz and a breakdown in attempts to restart negotiations,” he said.
“The risk of further disruption is also spreading beyond the Gulf, with the threat of renewed Houthi attacks on shipping adding another layer of uncertainty around key energy and trade routes. The major surprise is how calm markets remain in the face of all this, but if prices breach the March highs, things could get ugly very quickly.”
The Bottom Line
US borrowing costs have hit 5% for the first time since 2023 as oil prices surged above $108 a barrel following Houthi attacks on Saudi infrastructure. The spike has fueled inflation fears and triggered a global bond sell-off. Traders are awaiting a Federal Reserve decision on Wednesday, with analysts warning that further disruption could push prices even higher.
