Oil Surge Rekindles Inflation Fears, Sends Global Long-Bond Yields Soaring

A fresh selloff is spreading through global long-term bond markets as Middle East supply fears combine with a sharp rise in international oil prices. Renewed concern over inflation, coupled with the U.S. fiscal burden, is pressuring bond markets broadly and reinforcing the prospect of higher rates for longer.

The Financial Times reported on September 11 that the yield on the 30-year U.S. Treasury rose as much as 0.06 percentage point from the previous day to 5.35%, the highest level since 2007. A $6 billion Treasury buyback plan fell short of market expectations, while surging oil prices added to selling pressure on longer-dated debt.

TD Securities pointed to both oil prices and U.S. fiscal concerns as drivers of the recent jump in yields. Rate strategist Pooja Kumra said rising crude prices, the buyback plan and worries over fiscal credibility were together lifting the term premium on long-dated bonds.

The selloff spread to Europe as well. Fears of supply disruptions from the Middle East intensified after Houthi rebels seized key ports in Yemen and Saudi Arabia's oil production declined, sending bond yields in the U.K. and Germany sharply higher. The yield on the 10-year U.K. gilt climbed to 5.38%, the highest since 2007, while Germany's 10-year bund yield rose to 3.5%, the highest level since 2011.

The European Central Bank is also treating energy prices as a key inflation variable. After raising its benchmark rate to 2.5%, the ECB said euro-area inflation could remain above its 2% target for a considerable period if high oil prices persist because of the war involving Iran.

The rally in oil accelerated as well. Brent crude rose 6% intraday to as high as $107.31 a barrel. Saudi Arabia reported to OPEC that its average daily oil output in August fell 23% from a month earlier to 6.2 million barrels, the lowest level this year.

Bob McNally, founder of Rapidan Energy Group, described the recent moves in the oil market as a reversal of the price distortions that emerged after the Russia-Ukraine war in 2022.

U.S. inflation data added to pressure on the bond market. The Bureau of Labor Statistics said the producer price index rose 5.4% from a year earlier, up from 4.7% the previous month. Concern grew that higher fuel costs could feed into transportation and production expenses, slowing the pace of disinflation again.

Fiscal uncertainty is also being cited as a factor behind higher long-term yields. President Donald Trump proposed giving $5,000 to each U.S. citizen if Republicans retain control of Congress in the midterm elections. The expected fiscal cost is estimated at more than $1 trillion.

Markets are increasingly betting that Middle East supply disruptions will not be resolved quickly. With no clear sign of peace talks between the U.S. and Iran, major institutions are raising their oil-price forecasts for 2027.

S&P Global Energy said the crude market is shifting into a new equilibrium built around higher prices. With Middle East oil production potentially unable to recover to prewar levels by the end of next year, global bond markets are set to become even more sensitive to oil prices, inflation and the trajectory of U.S. fiscal credibility.