Treasury Yields Surge to Highest Levels Since July 2025 as Oil Shock Fuels Inflation Fears

Bond Market Repricing Reflects Inflation Concerns

The yield on the U.S. Treasury's 10-year bond has recently hit 4.4%—up from 3.95% just before the start of the conflict—and is now at its highest level since July 2025. Elevated bond yields, if sustained, will likely weigh on credit-market activity, transaction volume, and the U.S. housing market.

Inflation Expectations Climbing

Higher-for-longer energy prices mean higher-for-longer inflation and lower-for-longer economic growth, with forecasts revised accordingly, and key changes to forecasts in May include additional rate hikes in Western Europe led by the European Central Bank. The base case for the U.S. Federal Reserve is still that the next move in policy rates will be downwards under its new chair, though this has been pushed out to mid-2027, while futures markets have moved to discount a higher likelihood of a hike than a cut next year following recent strong U.S. inflation data.

Labor Market Weakness Concentrated in Specific Sectors

Employment fell in April in manufacturing, information services, and financial services, with federal government employment falling as well, while professional and business services saw only 7,000 new jobs. Workers' average hourly earnings were up 3.6% in April from a year earlier compared to 3.4% in March, marking the second-lowest increase in earnings since May 2021.

Purchasing Power Erosion Risk

Real (inflation-adjusted) earnings are likely decelerating at a time when inflation is modestly accelerating, and if inflation rises further due to the Middle East conflict, it will likely mean a loss of purchasing power for U.S. households, potentially contributing to slower economic growth.