Crude oil surge intensifies inflation concerns! U.S. Treasury yields soar across the board, with the 10-year breaking above 4.7% to hit an 18-month high.

Crude oil surge intensifies inflation concerns! U.S. Treasury yields soar across the board, with the 10-year breaking above 4.7% to hit an 18-month high.

U.S. Treasury yields rose across the board on Thursday, with the 10-year yield breaking above 4.7%, marking a new high since January 2025.

Multiple factors are fermenting simultaneously—the sudden escalation of the Middle East situation pushed Brent crude above $100 per barrel, U.S. initial jobless claims unexpectedly dropped sharply, and tech giants issued large volumes of long-term bonds to finance AI infrastructure, all putting pressure on the bond market.

The 10-year U.S. Treasury yield rose 5 basis points to 4.71%, the highest level since January 15, 2025, before the start of Trump’s second term. Meanwhile, the 30-year U.S. Treasury yield rose more than 4 basis points to 5.188%, with the yield staying above 5% for 27 trading days already this year, including 12 consecutive days, marking the longest period since the outbreak of the 2007 financial crisis.

The sharp rebound in oil prices has intensified market concerns about a resurgence of inflation.

Brent crude futures surged above $100 per barrel, rebounding sharply from last month's low after the initial peace deal between the U.S. and Iran, adding further uncertainty to the Fed’s policy path. FWDBONDS chief economist Chris Rupkey said, "The economy may be heating up today, but the escalation of the Middle East conflict has caused energy prices to climb almost overnight. The outlook for the job market remains full of uncertainties."

Initial jobless claims plunge, signals of economic resilience strengthen

For the week ending July 18, U.S. initial jobless claims dropped to 187,000, significantly lower than the 212,000 expected by economists in a Dow Jones survey, indicating the labor market remains resilient.

This data further reinforced the market’s expectation that the Fed will find it difficult to cut rates in the short term, and drove the 2-year U.S. Treasury yield up more than 4 basis points to 4.343%. Chris Rupkey pointed out that half of the Fed officials already consider rate hikes this year, but at the same time, structural risks in the job market—especially the increased difficulty for fresh graduates to find jobs—remain a hidden danger that policymakers must weigh.

"Whether it’s growth risks or the living cost crisis brought by high inflation, the economy has not truly emerged from its difficulties," he added.

The next focus for investors will be Friday’s release of the S&P Global U.S. Purchasing Managers' Index (PMI) flash report, which will further test the prosperity of the manufacturing and services sectors.

Middle East situation changes suddenly, oil price monthly gain ranks top three in a decade

Houthi forces claimed to have attacked two Saudi oil tankers in the Red Sea, combined with the U.S. threatening to escalate strikes against Iran, causing oil prices to almost instantly reverse their previous decline within the week.

Brent crude July delivery contract rose 5% in one day, closing above $99 per barrel, the highest level since the initial peace agreement between the U.S. and Iran; U.S. West Texas Intermediate crude futures rose about 4%, breaking above $90 per barrel. Brent crude’s monthly gains are expected to rank among the top three over the past decade.

The rapid rise in oil prices directly pushes up inflation expectations and transmits to global bond markets.

In Europe, the UK's 10-year government bond yield rose 4 basis points to break above 5%. The new Prime Minister Andy Burnham announced a 20% reduction in commercial tax rates for the hospitality sector, which is expected to cost about 100 million pounds (about $134 million), raising additional concerns among investors about fiscal discipline. The European Central Bank is expected to stay on hold at its policy meeting that day, to observe the real impact of the renewed escalation in the Middle East situation on the economy.

AI financing wave floods into bond market; long-term yields under high pressure

According to Bloomberg, tech companies are intensively issuing long-term bonds to finance AI infrastructure, competing with U.S. Treasury bonds for the same pool of buyers and becoming one of the structural factors keeping long-term yields high.

Currently, AI-related financing has surpassed $500 billion. Alphabet's financial report shows AI capital expenditures continue to expand, and Tesla’s Q2 spending on AI and robotics projects surged to $5.8 billion, causing the company to experience cash consumption for the first time in two years. Both companies’ stocks fell sharply in pre-market trading.

Tony Rodriguez of Nuveen Asset Management said: "Whether it’s governments, hyperscale cloud providers, or other issuers, credit bonds are now competing for the same group of investors at the long end with more borrowers."

Alex Payne of Vanguard Capital Management pointed out that traditional buyers of 30-year Treasury bonds such as pension funds and insurance companies now have a 'more diverse menu of choices than ever before,' and he believes yields have not yet peaked.

Since 2007, the size of the U.S. Treasury market has expanded from $4.5 trillion to $31 trillion, with debt as a percentage of GDP doubling to over 100%. Against the dual background of the AI capital expenditure wave and worsening fiscal conditions, fund managers generally believe that long-term yields above 5% will no longer be a fleeting phenomenon.

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