Oil jump sends 30-year yields to two-decade high

By Karen Brettell

NEW YORK, Sept 24 (Reuters) - Bond markets came under renewed pressure on Thursday with US 30-year bond yields hitting a more than 20-year high as rising oil prices reignited concerns about higher inflation and more Federal Reserve interest rate hikes.

Oil prices climbed about 3% to a one-week high after a Houthi missile attack on Saudi Arabia revived fears of supply disruptions, but trade was volatile and prices came off session highs after reports the US and Iran discussed reopening the Strait of Hormuz.

The interest-rate-sensitive US 2-year note rose 2.51 basis points to 4.92%.

The yield on benchmark US 10-year notes increased 8.17 basis points to 5.196%, the highest since 2007.

The 30-year bond yield gained 7.96 basis points to 5.4816%, the highest since 2004.

"The move higher in Treasury yields has likely been driven by a combination of rising Fed hike expectations, higher growth expectations, higher oil prices, fiscal concerns, and hyperscaler issuance," said Gennadiy Goldberg, head of US rates strategy at TD Securities. "The sharp rise in rates this week was likely exacerbated by investor positioning amid a rapid resurgence of oil prices."

Elsewhere, the yield gap between French and German 10-year debt widened to its broadest level since Mario Draghi's 2012 "Whatever it Takes" speech.

Thursday's move follows a sharp selloff on Wednesday when benchmark 10-year yields posted their largest daily increase since the April 2025 tariff turmoil. That was driven in part by stronger-than-expected US business activity data, which showed prices paid surged to a nearly four-year high this month.

The US central bank will likely need to raise interest rates again to curb unacceptably high inflation, two Fed policymakers said on Thursday.

Fed funds futures traders are now pricing in 71% odds of a Fed hike next month, up from around 53% before Wednesday's data.

The Treasury Department saw mediocre demand for a $44 billion auction of 7-year Treasury notes on Thursday, following weak interest at Wednesday's $70 billion sale of 5-year debt.

Separately, the Treasury said it bought back $4.078 billion in 20- to 30-year bonds as part of its ongoing buybacks to support market liquidity. Bonds worth $10.468 billion were offered during the operation. It had said earlier that it would buy back up to $6 billion in the debt.

YIELDS PRESSURE STOCKS

The Dow Jones Industrial Average fell 0.31% while the S&P 500 and Nasdaq Composite were roughly flat on the day. The Nasdaq had reached a record high on Tuesday.

MSCI's World Index dropped 0.29% and the pan-European STOXX 600 index was down 0.55%.

Traders are worried that higher bond yields could derail the equity rally by making borrowing more expensive and drawing investors out of stocks and into bonds.

Despite Thursday's weakness, some analysts say financial conditions still appear supportive of a resilient economy and stock market.

“Nothing in the data suggests policy is currently restrictive,” said Antonio Del Favero, head of US rates strategy at Macro Hive. He added that absent a drop of 20% or more in the S&P 500, and an even steeper decline in the Nasdaq Composite, sustained over an extended period, financial conditions are likely to remain loose.

The MSCI World Index halved in value the last time the 10-year Treasury yield broke above 5%, shortly before the global financial crisis.

A similar slump occurred less than a decade earlier, when a spike to nearly 6.8% helped burst the dotcom bubble.

TRADE TENSIONS

Meanwhile, US President Donald Trump welcomed Chinese President Xi Jinping to the White House on Thursday for a lavish state summit, with both leaders keen to showcase stable ties despite a host of thorny issues such as AI, trade, Taiwan and the war with Iran.

While analysts expect few if any major breakthroughs, Washington and Beijing may extend their 11-month trade truce. Treasury Secretary Scott Bessent said the two sides had reached a deal on an initial two-month extension, as Trump personally greeted Xi at Joint Base Andrews in Maryland.

In the currency market, the euro fell 0.04% against the US dollar to $1.1376, earlier hitting a two-month low.

Against the Japanese yen, the dollar strengthened 0.38% to 158.88.

Spot gold fell 0.3% to $4,274.14 an ounce.

(Reporting Karen Brettell, Marc Jones and Naomi Rovnick; Editing by Louise Heavens, Alexandra Hudson and Aurora Ellis)