US government bonds slid again Monday as Brent crude jumped above $108 a barrel after President Donald Trump rejected Iran’s latest proposal to reopen the Strait of Hormuz, reigniting a trade that has been punishing duration across major sovereign markets. The 10-year US Treasury yield rose to 5.23%, its highest since 2007, while the two-year yield climbed to 4.91%, underscoring how quickly a geopolitical oil shock can collide with a central-bank tightening story already in motion.
Energy and rates are now feeding each other in real time. Higher oil prices raise the risk that inflation stays sticky just as the Federal Reserve has already lifted borrowing costs earlier in September for the first time since 2023. Traders are also staring down this week’s Fed decision and a run of US labor market data, giving the market little room to absorb another jump in input costs without repricing the policy path.
The move in crude was immediate and broad. Brent rose more than 3% to as much as $108.27 a barrel in London morning trading Monday. That kind of jump is enough to revive the inflation narrative that bond investors have been trying to push back against. At the same time, the benchmark 10-year Treasury yield added about 5 basis points, and the 2-year yield also rose 5 basis points, showing that the sell-off is not confined to the long end.
The pressure did not stop at the US border. The sell-off spread to UK, German, French and Italian government bonds, with the 10-year gilt yield climbing to 5.42%. That matters because it suggests investors are not treating the move as a local Treasury story. They are reading it as a global repricing of risk tied to energy, central banks and the possibility that geopolitical stress could keep inflation elevated longer than expected.
The fresh trigger was political as much as economic. Trump rejected Iran’s latest proposal to reopen the Strait of Hormuz, according to the market reports cited by Bloomberg and The Edge Singapore. The market response was classic: crude surged, and sovereign bonds sold off as investors recalibrated the odds that oil supply risks will linger. Trump said he expects negotiations to resume this week despite rejecting Tehran’s offer, leaving traders with a mixed signal but no immediate relief.
That ambiguity is part of the problem. If talks restart but do not quickly reduce the chance of disruption, energy traders can keep bidding up risk premium while bond investors keep demanding more yield. In other words, the market is trying to price both diplomacy and delay at the same time. That is rarely comfortable for rates, especially when the starting point is already a 10-year yield above 5%.
The bond move is about more than geopolitics. It is also a response to the Fed’s recent shift. The central bank raised borrowing costs earlier in September for the first time since 2023, which means policymakers have already signaled they are not done worrying about inflation. Add oil above $100 and the message becomes harsher: the market may have to accept tighter financial conditions for longer.
That is why the quotes from rates strategists landed so hard. Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities, said, “President Trump knocking back Iran’s offer for diplomacy is driving a renewed rise in oil prices and is weighing on US Treasuries.” Damien McColough, head of fixed income research at Westpac, said, “The ongoing hawkish Fed messaging and oil above US$100 are pivotal to the bearish impetus.” Geoffrey Yu, senior strategist at BNY in London, added, “That undercurrent of supply constraints on energy is going to remain.” Each comment points to the same trade: oil higher, yields higher, and less faith that bonds can rally unless inflation fears ease.
The 10-year US yield at 5.23% is notable not just because it is higher, but because it is in territory not seen since 2007. That gives the move a psychological edge. A Treasury market that was already struggling with the Fed’s policy stance is now facing a fresh energy shock, and those two forces tend to reinforce one another when investors worry that stronger oil prices could spill into wage and price expectations.
The two-year yield’s rise to 4.91% is just as important. Shorter-dated yields are often the clearest read on expectations for central-bank action, and the move suggests traders are not dismissing the chance that the Fed stays restrictive. Money markets are already pricing a 68% chance of a 25 basis point October hike, according to Tradeweb data cited by The Guardian and Sina. That makes this week’s policy meeting even more sensitive, because any hawkish signal would likely keep pressure on both ends of the curve.
The market is also reading the broader implications for growth. Higher oil can squeeze consumer spending, raise input costs for companies and complicate the outlook for inflation without necessarily improving demand. That combination is bad for bonds because it can leave the economy slowing while price pressures remain stubborn. It is also bad for equities if borrowing costs stay elevated and earnings margins come under pressure.
The cross-asset reaction Monday suggests investors are beginning to price that risk more aggressively. When crude breaks higher and government bonds in the US and Europe sell off together, it usually means the market is less focused on growth fears and more focused on the inflation consequences of a supply shock. That is a dangerous mix for duration-heavy portfolios and for any investor betting the Fed will have room to ease quickly.
The immediate test is Wednesday’s Federal Reserve decision, followed by labor market data later in the week. If policymakers sound concerned about inflation persistence, the bond rout could extend. If labor data is firm, the market may be forced to price even more policy tightening on top of the oil spike. Either way, the burden of proof is now on bonds to show they can stabilize before energy prices and Fed risk push yields even higher.
For now, the message from Monday is blunt: as long as Brent holds above $108 and diplomacy around Iran remains uncertain, Treasuries are vulnerable. The trade is no longer just about rates. It is about oil, geopolitics and a central bank that has already shown it is willing to keep pressure on borrowing costs.
