US government borrowing costs reached 5% on 10-year Treasury bonds, marking the first time at this level since October 2023. The increase occurred amid intensifying sell-off pressure in global bond markets, coinciding with crude oil prices reaching $108 per barrel. Traders awaited a Federal Reserve interest rate decision scheduled for Wednesday, with yields having climbed steadily from a low of 4% earlier in the year following regional geopolitical developments in late February.
The spike in borrowing costs reflected growing inflation concerns tied to escalating Middle East tensions. Houthi forces aligned with Iran launched drone attacks against Saudi Arabia and captured the strategic island of Perim in the Bab al-Mandab strait, prompting Saudi Arabia to close a vital east-west crude pipeline. Brent crude surged 3.7% on the day as traders warned Saudi Arabian oil export stocks could be depleted within days without pipeline reoperation. Gas prices also climbed, with the UK benchmark rising 5% to its highest level since December 2022.
The consequences extended across Atlantic markets, with borrowing costs rising throughout Europe. UK 30-year government yields reached their highest level since March 1998. These developments preceded anticipated central bank decisions, including an expected rate increase from the Federal Reserve and a hold decision from the Bank of England, with analysts warning of continued bond market volatility ahead.
Retail fuel prices climbed to new highs, with petrol averaging 169.68p and diesel at 191.68p. Oil had fluctuated significantly throughout the year, rising from approximately $72 per barrel before the conflict began to a peak of $126 in April, before retreating over the summer amid ceasefire hopes. Recent escalations drove prices back above $100 per barrel, with market analysts warning of potential breaches of spring highs if disruptions continued affecting energy infrastructure and shipping routes.
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