The US 10-year Treasury yield hit its highest level since 2007 on Tuesday, as oil prices jumped above $105 a barrel and stocks slumped on higher odds of an interest-rate hike this week.
The 10-year Treasury yield was at 5% as of the afternoon. Earlier in the session, it hit 5.041% — its highest level in 19 years — as traders grew more convinced the Federal Reserve will raise interest rates to counter inflation at its Wednesday meeting.
A massive rise in diesel prices amid the Iran war has helped drive the yield higher, as economists have warned that diesel inflation can bleed through to the rest of the economy since most food, apparel and other consumer goods are transported via truck.
National average diesel prices hit a fresh record high of $6.27 a gallon on Tuesday, up from the previous day’s record $6.23. Gasoline prices reached $4.33 a gallon.
Brent crude oil surged 2.9% to $108.76 a barrel as the Middle East crisis shows no signs of slowing, raising concerns that crucial energy supplies through the Strait of Hormuz could remain disrupted – worsening inflation.
The Dow Jones Industrial Average had fallen 465 points, or 0.9%, as of about 2:50 p.m. ET, while the S&P 500 and Nasdaq slumped 0.5% and 0.8%, respectively.
The 30-year Treasury yield, which is more sensitive to geopolitical shocks, jumped to 5.368%. The 2-year Treasury yield rose to 4.665%.
One of the key concerns with rising Treasury yields is that they have the potential to worsen affordability issues — higher rates raise borrowing costs on mortgages and auto loans, as well as business loans.
Investors priced in a 94% chance the Fed will raise interest rates by a quarter point to the 3.75% to 4% range Wednesday, which would be its first rate hike in three years, according to CME FedWatch, which tracks Fed Funds futures.
Morgan Stanley and Goldman Sachs abandoned their predictions the Fed will hold interest rates steady on Wednesday, instead predicting a rate hike Wednesday — with at least one more to follow later this year. The two rival banks were the last Wall Street holdouts on a rate hike forecast.
National Economic Council Director Kevin Hassett tried to quell fears around stubborn inflation, saying he believes there are signs that inflation is cooling.
“If you look at the sort of near-term memory and the stochastic process that drives inflation, then you can see that things are slowing down,” he told CNBC’s “Squawk Box” on Tuesday. “That would be the argument that one would make if you were going to dissent tomorrow. But again, we respect the decision that the Fed makes.”
Under Fed Chair Kevin Warsh, who took the helm in May, dissent has been deepening at the central bank, as some policymakers have already pushed for a rate hike.
Officials have been split over whether it’s too soon to hike interest rates, which could stunt economic growth, or too late, which could allow inflation to run out of control.
Stocks tied to AI have taken a hard hit this week, as industry leaders have urged a slowdown in development and one researcher even warned the tech “could kill us all by the end of the decade.”
Shares in Micron and Intel slipped 0.4% and 0.3%, respectively, on Tuesday.
The emerging technology and the massive data centers that go with it have faced blowback for months over accusations of water, noise and light pollution, and concerns that the new tech could eradicate American jobs.