US 10-Year Treasury Yield Crosses 5% as Crude Spike Revives Rate-Hike Bets

US Treasury bond yields surged on Monday, with the 10-year yield breaching the 5% threshold for the first time since October 2023. The sharp movement across long-dated government debt accompanied a 4% jump in crude oil prices, which stoked fresh inflation concerns across international financial markets and forced traders to reprice monetary policy expectations ahead of the Federal Reserve meeting.

Market participants are now factoring in an estimated 87% probability that the US central bank will raise interest rates by 25 basis points at its conclusion on Wednesday. The mounting yield pressures reflect a convergence of macroeconomic headwinds, spanning commodity spikes, resilient domestic economic activity, and heavy sovereign and corporate debt issuance.

Brent crude oil climbed to $108 per barrel, while West Texas Intermediate traded at $103.6 per barrel, driven by escalating supply risks in the Middle East following fresh Houthi strikes on Saudi Arabia, reported tanker attacks in the Gulf, and the closure of a major Saudi oil pipeline. Regional diplomatic efforts stalled after a scheduled meeting between Iran and neighboring Gulf states was postponed.

Energy cost increases immediately reverberated across commodity exchanges, pulling precious metals downward. Spot gold fell 0.92% to $4,284.52 per ounce, extending its losing streak to a third consecutive week, while US gold futures declined 1.1% to $4,361.20 per ounce. Spot silver retreated 1.30% to $62.96 per ounce. In domestic Indian trading on the Multi Commodity Exchange, gold October futures dropped 1.26% to ₹1,50,856 per 10 grams, and silver December futures fell 1.90% to ₹2,30,513 per kilogram.

The abrupt tightening in financial conditions caught investors recalibrating positions as the Federal Reserve prepares for its two-day policy meeting concluding Wednesday at 2 pm in Washington. Futures traders utilizing the CME FedWatch Tool adjusted rate-hike expectations upward from roughly 67% prior to the latest US inflation print, which showed core consumer inflation rising 0.3% month-on-month.

Federal Reserve Chairman Kevin Warsh has maintained a cautious posture on rate paths, emphasizing the central bank's focus on price stability. Analysts note that Warsh's previous remarks at Jackson Hole calling for clear and rapid deceleration of inflation toward the 2% target leave little tolerance for sticky energy prices, reinforcing market expectations for potential rate tightening or hawkish forward guidance.

Beyond immediate commodity pressures, bond market strategists point to resilient US economic growth as a structural impediment to monetary easing. Continued economic expansion limits the necessity for rate reductions while providing leeway for monetary authorities to maintain restrictive policy stances.

Heavy government borrowing continues to expand debt supply, requiring investors to demand higher yields to absorb additional sovereign issuance. Compounding this supply pressure is corporate borrowing directed toward data center construction and artificial intelligence infrastructure, which increases competition for capital in domestic debt markets.

Global monetary tightening pressures extend beyond North America, with the Bank of Japan widely expected to implement a rate hike in the upcoming week amid persistent domestic inflation and steady economic output. Investors await the official Federal Reserve rate announcement and accompanying policy statement on Wednesday to determine the trajectory of benchmark borrowing costs.

Jateen Trivedi, Vice President of Research Analysis for Commodity and Currency at LKP Securities, noted that impending central bank decisions will likely maintain near-term downward pressure on precious metals, projecting spot gold to trade within a range of ₹1,49,000 to ₹1,54,000.