Bond Yields Ease From 24-Year Highs as Oil Cools, Treasury Acts

A pause in the selloff

Government bonds have been selling off for months. In early October they got some relief, though not much. The 10-year U.S. Treasury yield peaked near 5.36% on October 7, its highest level in 24 years. By the end of the week it had settled around 5.22% to 5.24%.161411 The 30-year bond made a similar round trip. On October 8 it fell from 5.73% in the morning to 5.60% after a $22 billion auction of 30-year bonds cleared at a high yield just under 5.62%.6 A strong auction of 10-year notes the day before had already shown that investors will still buy U.S. government debt at the right price.7

The pattern started a week earlier. On October 1 the 10-year yield moved past its April 2002 level and then dropped back to about 5.24%. The 30-year also touched a 24-year high before falling.2 The next day, Brent crude fell about 2% to just under $100 a barrel, and yields eased across Europe and the U.S.3 On October 6, Bloomberg reported that yields had fallen from their 2002-era highs as oil steadied and Treasury Secretary Scott Bessent said the government's debt load could be brought under control.91

All of this coverage tells the same basic story: yields drop when oil drops, and buyers return when yields get high enough. The harder question is whether these dips mean anything lasting. The evidence suggests they don't.

Oil is driving the moves

Energy prices have been the biggest short-term influence on bonds since the U.S.-Iran conflict began in late February.9 CNBC has described Treasuries as moving in step with crude as the war choked off Middle East exports.2 Brent has swung between about $96 and nearly $110 over the past month.8 On October 8 it rose 4.1% to $104.28. In between, it briefly dipped toward $103 after President Trump said "productive discussions" were under way with Iran.87

The physical supply picture is still tight. One analysis puts crude flows through the Strait of Hormuz about 30% below prewar levels. It counted only four tanker transits on October 4, against a normal pace of roughly 85 a day.16 Analysts largely agree on what a lasting bond rally would need. Schroders fund manager James Ringer said energy prices have to fall, and that this means refined products such as diesel as well as crude.9 REX Shares makes a similar case. It argues that diesel now matters more to inflation than crude because the shortage is in distillate fuel, and diesel feeds into freight and delivery costs and then into core prices.18

The forecasts do not agree on oil. KKM Financial's Jeff Kilburg expects the 10-year to fall back to around 4.5%–4.75% if the U.S. and Iran reach a deal.2 Contrarian Macro Advisors' David Hunter goes further. He believes yields have peaked and that oil could reach the $60s by year-end. But the same analysis that reports his view notes that no major institutional forecaster backs that oil call.16 For now, oil above $100 and lower yields are not a stable mix.

What the inflation data show

Inflation fears are real, but the data point somewhere slightly different from the headlines. In the U.S., headline PCE inflation ran at 3.4% in August and core PCE at 3.0%.18 Energy prices were about 16% higher than a year earlier in the August CPI report.18 Euro-area inflation jumped to 3.8% in September, a three-year high and above economists' forecasts. Spain's rate reached 5%.3

The signal from the bond market itself is more surprising. The 10-year breakeven inflation rate, which measures the inflation investors expect over the next decade, was about 2.28% on October 9.17 The real yield on 10-year inflation-protected Treasuries (TIPS) was about 2.87%.1314 In other words, investors do not expect 3%-plus inflation to last. Most of the rise in long-term yields comes from higher real yields and a larger term premium, which is the extra return investors want for holding long bonds instead of rolling short-term bills.

REX Shares reached the same conclusion. It noted that breakevens stayed around 2.2%–2.3% and pointed to real yields and the term premium as the main drivers of long-term rates.18 One estimate puts the 10-year term premium at 1.02 percentage points, its highest since 2010.24 This explains why dips in oil bring only partial relief. Lower energy prices can ease rate-hike fears at the short end. They do little about the supply of new debt, the deficit and the uncertainty that are pushing long-term yields up.

The Federal Reserve

The Fed raised rates by a quarter point on September 16, its first increase since 2023, bringing its target range to 3.75%–4.00%.18 Minutes from that meeting showed most officials expect another hike this year, though they did not say when.11 The softer PCE report cut the market's estimated chance of an October hike to about 39%.15 HSBC strategists called the roughly 80 basis points of hikes priced for next year "excessive."9

That split matters for the shape of the yield curve. Weak hiring and slightly softer data are pulling down short-term yields. Supply worries are keeping long-term yields high. The gap between 2-year and 10-year yields has widened to about 45 basis points.18 Fed data show the 2-year yield fell from 4.84% on October 5 to 4.75% on October 8. The 10-year fell less over the same days, from 5.31% to 5.22%.14 The steepening curve suggests investors' main concern is long-term debt supply, not an immediate recession.

Treasury's response is small next to the problem

The hope for more Treasury action comes from Bessent's buyback program. In August, the Treasury at least doubled its buybacks of 10- to 30-year bonds to at least $4 billion per operation. Starting September 9, some operations went as high as $6 billion.2421 Bessent has said a mix of growth and spending restraint will soon start "bending that curve" of government borrowing.9

The numbers show the limits. One commentary estimates that the expanded buybacks absorb only about 14% of new long-term supply.26 LPL Research puts it as roughly one dollar bought back for every seven sold.29 In September, the Treasury sold $74 billion of new 10-, 20- and 30-year debt and bought back $9.3 billion of older long bonds.24 Buybacks also don't reduce the debt. The Treasury pays for them by issuing more short-term bills, which carry more exposure to Fed rate hikes.2624 Goldman Sachs analysts make a related point: changing the mix of debt the Treasury sells doesn't change how much it needs to borrow.22

The early market reaction was not encouraging. Long-term yields fell for about a day after the August announcement and then climbed past where they started.25 Bessent has softened his tone. A month after saying he was "the house now," he admitted he "can't control the bond market" while insisting the house wins "over time."28 Skeptics remain. "A stated ambition is not a plan," Macquarie strategist Gareth Berry said, noting the deficit is around 6% of GDP.9 The issue has also become political. Senator Elizabeth Warren sent Bessent a letter calling the interventions "unprecedented and chaotic" and asking what else the Treasury plans to do to bring down long-term yields.23

The next scheduled step is the Treasury's November 4 refunding announcement, where it will set new buyback sizes. At least one market commentator expects them to grow.24 Analysis built on the Treasury's own advisory committee suggests its options are mostly to buy back more or shift borrowing toward bills, and both have limits.2629

A global problem

The U.S. is not alone. Japan's 10-year yield reached its highest level since the mid-1990s. Germany's 10-year Bund rose above 3.6%, a level last seen in 2008.2 Britain's 30-year gilt yield went above 6% for the first time since 1998. France's borrowing premium over Germany passed 140 basis points, its widest since 2012.3 The Institute of International Finance estimates that developed economies paid more than $3.3 trillion in interest on internationally traded government bonds over the past year.3 U.S. federal interest costs are running at about $1 trillion this fiscal year, more than the government spends on defense.29

These costs are already reaching households. The average 30-year mortgage rate is about 7.5%, its highest in almost three years.28

Outlook

The recent decline in yields looks like a pause, not a turning point. It came from a dip in oil and solid demand at bond auctions. The forces behind the selloff are still in place: diesel shortages, a war that still restricts Hormuz shipping, heavy debt issuance, and buybacks too small to offset it. Forecasts reflect the uncertainty. Nuveen expects the 10-year to end the year at 4.95%.20 REX Shares expects long-term yields to stay roughly where they are, with the curve steepening further.18

The next tests come quickly. September CPI is due October 14, the Fed meets October 27–28, and the Treasury's refunding announcement follows on November 4.181624 If oil cannot stay below $100, the pressure on long-term Treasury yields is likely to return.