Debt costs rise as Treasury yields cross 5% curve line again

Treasury yields rose to a 19-year high Monday after President Trump rejected Iran’s Hormuz proposal, lifting borrowing-cost pressure.

The 10-year yield climbed 9 basis points to 5.25%, its highest level in 19 years. The 30-year yield reached 5.57%, the most since 2004, while shorter maturities also rose as traders priced additional Federal Reserve tightening.

Hormuz rejection hits bonds

The latest move followed Trump’s rejection of Iran’s proposal tied to reopening the Strait of Hormuz, a shipping route central to global oil flows. Oil prices rose earlier in the New York session after Iran said it would not relax its conditions for restoring traffic through the waterway.

People briefed on the discussions said Iranian officials privately doubted that Washington and Tehran could reach a deal to end the fighting and reopen the strait before the November midterm elections. Oil later pared gains after a report that Trump was willing to offer sanctions relief for concrete progress on the nuclear issue, but Treasury yields remained near the day’s highs.

Oil prices feed Fed bets

High energy prices are adding to the Federal Reserve’s inflation problem after price growth had already stayed above the central bank’s target since 2021. Swap markets are fully pricing at least three more quarter-point rate increases over the next 12 months, with a fourth increase still reflected as a possibility.

Ian Lyngen, head of US rates strategy at BMO Capital Markets, said oil and the Iran war were still shaping macro trading even when other forces briefly dominated. “While there have been episodes when monetary policy and/or economic data overshadowed the fluctuations in oil prices, it is clear that the potential fallout on the global economy from the war with Iran remains a key driver of the macro narrative,” Lyngen said.

The selloff has broadened beyond the direct oil shock. Stronger US business activity and concern over federal debt levels have added pressure to a Treasury market already adjusting to higher inflation expectations and heavier government financing needs.

Old bonds take heavier losses

Higher yields mean lower bond prices, and the adjustment is hitting older securities issued when rates were near pandemic-era lows. A 30-year Treasury sold in May 2020 with a 1.25% coupon has dropped below 43 cents on the dollar, a record low for that issue.

The pressure now spans most of the curve, with all maturities except the two-year note trading above 5%. The extra yield on 10-year Treasuries over two-year notes narrowed to 17 basis points last week, the thinnest gap since early 2025.

The Trump administration has increased buybacks of longer-dated bonds, but yields have continued to rise across maturities. For companies, households and the federal government, that translates into higher costs for refinancing, mortgages, credit lines and new borrowing.

Demand risk enters the trade

Brij Khurana, a portfolio manager at Wellington Management, said investors may be focusing too narrowly on each Iran headline. “People are trading the Iran war headlines for yields to rally or yields to sell off,” Khurana said. “They might be missing the bigger picture, which is that with commodities prices this high for this long, it is going to start to create negative real income and demand destruction.”

If oil remains elevated and the Fed follows market pricing for more increases, the global macro effect would likely run through tighter financial conditions and weaker real incomes. For the Treasury market, that path would keep pressure on long-duration debt; for banks, insurers and asset managers, it would extend mark-to-market losses on older bond holdings.

If Hormuz talks resume and oil eases, the inflation channel would weaken, giving traders room to pare some Fed-hike bets. The open question is whether lower energy prices would arrive before higher borrowing costs slow demand across credit-sensitive sectors such as housing, autos and capital spending.