Government borrowing costs hit highest level since 2007
High bond yields put upward pressure on mortgage and credit card rates.
Long-term government borrowing costs climbed to their highest level in nearly two decades as the Iran war showed little sign of a resolution and investors feared persistent inflation.
The 30-year Treasury yield jumped to 5.32%, registering its highest level since 2007, before dropping slightly lower. The surge in borrowing costs threatens to raise mortgages and credit card rates, since long-term bond yields help set interest payments for various consumer loans.
Major stock indexes fell in response to rising yields. The Dow Jones Industrial Average ticked down 15 points, or 0.03%, while the S&P 500 dropped 0.4%. The tech-heavy Nasdaq declined 1%.
Since bonds pay a given investor a fixed amount each year, the specter of inflation risks higher consumer prices that would eat away at those annual payouts. As a result, investors tend to sell off bonds if they fear a prolonged bout of inflation.
In this case, a global oil shock has pushed up energy prices which in turn has trickled into other costs, such as groceries.
Global oil prices ticked above $91 a barrel on Tuesday, up nearly 30% since the outbreak of the Iran war in late February. The average price of a gallon of gas is $4.06, putting it well above an average of $2.98 before the war, AAA data showed.
Iran’s near-closure of the Strait of Hormuz choked off a trade route responsible for about 20% of global oil supply. A U.S. blockade of Iranian ships deepened the crude shortage. On-again, off-again negotiations have failed to restore tanker tariff in the strait.
An average of about 13 ships crossed the strait each day last week, oil data company Kpler said in a post on X, down from more than 100 ships per day before the recent conflict.
Inflation, in turn, has stayed elevated. Prices rose 3.4% in July compared to a year earlier, marking a slight cooldown from the prior month, federal government data last week showed.
Still, inflation stands more than a percentage point higher than the Federal Reserve's target rate of 2%.
The Fed, meanwhile, has opted against imposing interest rate hikes in response to the oil-driven rise in prices. The central bank could hike rates in an effort to cool off prices, but the move risks an economic slowdown that may pinch hiring.
Fed Chair Kevin Warsh, who took the helm of the central bank this summer, has repeatedly vowed to dial back inflation.
"The committee remains resolute -- you’ve heard this before -- that we will deliver price stability," Warsh told reporters in Washington, D.C., last month.
Investors, however, appear skeptical of the central bank's willingness to urgently increase rates.
Odds of a quarter-point rate hike at the Fed's next meeting in September stand at 34%, according to the CME Group's FedWatch Tool, a measure of market sentiment.
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