Not seen since 2007! The US bond market is sounding the alarm.

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The U.S. Treasury market is undergoing its most severe stress test in nearly two decades. Triggered by the sustained escalation of tensions in the Middle East, surging oil prices breaching the $100 mark, and rekindled inflation expectations—a triple shock—Treasury yields have climbed across the board to multi-year highs. In particular, the 30-year Treasury yield has set the longest streak at elevated levels since 2007, sharply altering market expectations for the Federal Reserve's policy outlook.

On Thursday, the 10-year U.S. Treasury yield rose by 4 basis points to 4.71%, reaching its highest level since January 2025. The 30-year yield climbed to 5.19%, maintaining over 5% for the longest period since 2007. At the same time, Brent crude oil futures soared 7% in a single day, breaking above $100 per barrel, as markets focused on escalating Middle Eastern conflicts and reports of a tanker being attacked near the Saudi coast.

Rising yields have quickly translated into higher financing costs for U.S. businesses. The 10-year Treasury is a key benchmark for mortgage and corporate loan pricing; this week, the average 30-year fixed mortgage rate in the U.S. rose to 6.58%, near a one-year high. U.S. equities were also under pressure: on Thursday, the Dow Jones Industrial Average fell nearly 1%, the S&P 500 dropped 1.2%, and the Nasdaq Composite declined 2.15%.

Goldman Sachs' trading desk previously identified the 10-year Treasury yield at 4.7%, WTI crude at $90, the VIX at 20, and the S&P 500's 50-day moving average as key psychological thresholds. Now, the 10-year yield has already hit 4.7%. Nomura analyst Charlie McElligott believes the rates market is already trading ahead of other investors’ policy expectations and expressing dissatisfaction with whether a 'hawkish hold' is sufficient.

30-year Yield Holds Above 5%, Setting Longest Record Since 2007

The core of this volatility in Treasuries is the increasing stickiness of long-end yields above 5%.

According to Dow Jones market data, the 30-year Treasury yield had stayed above 5% for 11 consecutive trading days as of Tuesday, and on Wednesday further set a new record for the longest period above 5% since 2007. On Thursday, it climbed further to 5.19%.

This range isn't an automatic "red line" that triggers a market crisis. Market participants generally perceive 5% more as a psychological marker rather than a point that would force the U.S. to halt public market borrowing immediately. Bond prices move inversely to yields. Persistently high yields mean investors are demanding greater returns to compensate for the risks of inflation erosion, expanding fiscal deficits, and increased long-term bond supply.

Dustin Reid, chief fixed income strategist at Mackenzie Investments, pointed out the "biggest enemy" for long-duration bonds is inflation: "If inflation stays high for a long time, investors need to be compensated."

Notably, unlike in 2023 and earlier this year, this round of 30-year yields finds it difficult to fall back quickly once hitting 5%. Vanguard’s head of mortgage, agency, and volatility strategies, Alexander Payne, said there is no single "catalyst" for this sell-off, and the market has not shown signs of quickly "buying the dip." He thinks that, given the massive U.S. fiscal deficit and the historic spending expected on AI infrastructure, "there will be lots of opportunities to buy higher-yielding, long-duration debt."

Oil Price Shock Rekindles Inflation Expectations, Rate Hike Bets Surge

Brent crude breaking $100 per barrel is the direct trigger for this round of bond market turmoil.

Since the U.S.-Iran conflict erupted in late February, energy markets have remained under pressure. After a ceasefire agreement in June, oil prices once retreated and inflation cooled, but fragile Middle East peace quickly unraveled, and Brent has since rebounded sharply from its lows. Capital Economics’ climate and commodities economist Hamad Hussain said, "Unless there is a clear sign of de-escalation, oil price upside risks remain substantial."

Before the oil price surge, institutions such as Goldman Sachs and UBS expected the Fed to hold rates steady this year. Currently, markets are repricing for a more hawkish policy path. According to CME FedWatch, traders now assign a 36% chance the Fed will hike rates at its next meeting. Polymarket data show bets on a rate hike by 2026 have risen to 71%.

Nomura’s equity derivatives analyst Charlie McElligott warned in a Thursday note that the rates market is actually trying to "second guess the guessers," possibly staging a "mini tantrum" to signal that a hawkish hold is not enough. He added the oil shock implies greater rate volatility ahead, forcing central banks to reprice their hawkish stances, ultimately triggering broad tightening of cross-asset volatility.

Goldman Sachs’ desk advised watching several key psychological levels: the S&P 500’s 50-day average (7462), the 10-year yield at 4.7% (last seen January 2025), WTI at $90, and the VIX at 20. McElligott also warned that the VIX’s seasonal pattern is set to "take off" in August—a period of thin liquidity and low risk tolerance.

Fiscal Financing and AI Bond Supply Add Pressure to Long-End Treasuries

Oil prices are not the sole factor driving Treasury yields higher. The growing fiscal deficit, Treasury supply and demand, and increased long-term corporate bond issuance are collectively changing the supply-demand balance at the long end.

The worsening U.S. fiscal situation adds another layer of concern for the bond market. Defense Secretary Pete Hegseth testified to Congress Tuesday that the Iran war has so far cost $37.5 billion, and the Trump administration is applying for an additional $67 billion to support the escalating conflict. Meanwhile, U.S. Treasury debt now stands at $39.6 trillion, nearly five times the $8.35 trillion seen in August 2007, with Treasuries-to-GDP surpassing 100% last spring.

At the same time, overseas buyers’ participation in the Treasury market has declined compared to past decades. Wellington Management portfolio manager Brij Khurana notes that foreign buyers’ presence has diminished even as U.S. debt nears $40 trillion and issuance demand rises. He believes domestic investors will need to "take the baton" from foreigners, but may only step up "if equities fall."

The bond market also faces structural supply pressure from corporates. According to MarketWatch citing BondCliQ data, the combined face value of outstanding bonds of Microsoft, Amazon, Google parent Alphabet, Nvidia, Meta, and Oracle due by 2026 is nearing $500 billion. The AI capital expenditure arms race is offering bond investors plenty of alternatives to 30-year Treasuries, further diverting demand from U.S. government debt.

Additionally, the bond market is also influenced by speculation on the policy orientation of new Fed Chair Walsh. Walsh has pledged to push forward Fed reforms and has set up task forces to review communications, the inflation framework, and balance sheet policy. Baird Strategas Director of Fixed Income Research Tom Tzitzouris said, "The biggest driver right now may be the Walsh story, and how he will carry out his role as Fed Chair."

Rising Rates Begin to Test Stock Market Valuations and Housing Finance

Rising Treasury yields are spilling over from the bond market into U.S. equities and real estate.

In previous weeks, U.S. stocks’ response to rising oil prices had been relatively muted. Piper Sandler chief investment strategist Michael Kantrowitz believes equities could remain resilient as long as the 10-year yield stays near 4.65% and oil near $87, helped by still-low short-term realized volatility and continued upgrades to corporate earnings forecasts.

But as oil climbs to $100 and the 10-year yield tops 4.7%, this balance is starting to crack. Rising yields increase financing costs for companies and compress the valuation space for highly valued assets. Tech stocks weakened on Thursday, widening the Nasdaq Composite’s slide and illustrating the market’s rising sensitivity to rates and capital expenditure.

Housing is also being directly affected. The 30-year fixed mortgage rate in the U.S. is now 6.58%, close to a one-year high. Higher mortgage rates typically curb refinancing activity and raise monthly payments for homebuyers.

Mackenzie’s Reid warned that if the 30-year yield hits 5.25%, the Treasury Department will begin to worry. "They don’t want the long end of the yield curve to spiral out of control, since that would certainly pose risks for stocks and valuations." JPMorgan CEO Jamie Dimon also recently said he would not buy long-term Treasuries at current prices, warning that the deficit "will become a problem" and that "bond vigilantes" will return.

Risk Warning and DisclaimerMarkets involve risk, and investments need to be cautious. This article does not constitute personal investment advice, nor does it take into account individual users' specific investment objectives, financial circumstances or needs. Users should consider whether any opinions, views or conclusions in this article are suitable for their particular circumstances. Investing based on this is at your own risk. ```