Despite falling oil prices and dovish comments from Fed officials, US Treasury yields continue to rise

The wave of U.S. Treasury sell-offs continues to spread, with long-term yields repeatedly hitting new highs, making the market's outlook on interest rates increasingly complex.

On Tuesday, the 30-year Treasury yield reached a 24-year high, while the 10-year yield also rose to its highest level since 2002. This move was particularly notable as oil prices had obviously pulled back that day, and New York Fed President John Williams issued dovish signals, suggesting there was no rush to raise rates. Yet, these two negative factors failed to prevent yields from rising. The persistent trend in the Treasury market is transmitting to equities, with the three major indexes closing slightly lower.

Behind the persistent climb in yields is a repricing of the Federal Reserve's rate hike trajectory and inflation concerns driven by energy price volatility due to the Iran conflict. Even though oil prices have experienced a temporary decline, investor confidence in geopolitical conditions remains fragile, making it difficult to return to optimism.

30-Year Yield Breaks Out, Hits 24-Year High

The 30-year U.S. Treasury yield is currently at 5.564%, and during Tuesday’s session, it reached 5.621%, surpassing the intraday high from 2004 and marking the highest level since June 2002.

The 10-year U.S. Treasury yield settled at 5.256%, also reaching its highest closing level since 2002. However, this yield has yet to break the intraday peak of 5.303% set in 2007—a level viewed by Wall Street as a significant technical resistance, and thus closely monitored by the market.

Rebecca Venter, senior manager of fixed income client portfolios at Vanguard, stated, "The market is truly beginning to figure out how much further the Fed will need to raise rates to achieve its targets."

Bulls and Bears Intertwined, Divergence Between Long and Short Ends

The bond market was not one-sided on Tuesday; both bullish and bearish forces applied pressure, resulting in a divergence between long- and short-end yields.

Long-end yields were pushed higher partly due to supply-side shocks. Paramount Skydance is expected to issue about $3.2 billion in bonds to fund the acquisition of Warner Bros. Discovery. Investors are making room in portfolios to absorb these new bonds, which has led to selling pressure on long-term Treasuries.

Short-end yields were suppressed by remarks from John Williams. The influential Fed official noted in his speech that further rate hikes "later this year" might be appropriate, but stressed that there was "no need to rush." Earlier this month, the Federal Reserve had already voted to raise rates for the first time in three years.

Oil Prices Retreat, but Market Confidence Remains Difficult to Restore

Since the Iran conflict erupted, oil prices have been one of the key variables driving U.S. Treasury yields higher. Rising energy costs heightened inflation pressures, causing concern that the Federal Reserve may have to extend its tightening cycle into next year.

On Tuesday, Middle Eastern crude oil exports rebounded to their highest level since the beginning of the conflict, causing Brent crude futures to fall by 2.6%, settling at $102.59 per barrel.

However, the decline in oil prices has not effectively boosted market sentiment. Baird investment strategist Ross Mayfield pointed out that, after so many instances of “false dawns” and shifting headlines, investors find it hard to build real confidence in optimistic developments regarding the Iran situation.

Cboe Global Markets noted in a research report last week that the correlation between the U.S. benchmark oil price and the 10-year U.S. Treasury yield has jumped to its highest level in 35 years, just slightly below the historical record set at the outbreak of the first Gulf War in 1990.

High Yields Reshape Stock Market Structure, AI Becomes Final Support

Rising rates are profoundly transforming the internal structure of the stock market. Mayfield said that high rates are having the most pronounced impact on sectors such as housing and consumer goods. At the same time, when short-term Treasuries already offer substantial returns, investors are inclined to withdraw from high-dividend sectors like utilities.

"What remains is a stock market increasingly reliant on artificial intelligence to drive growth," Mayfield said. "That makes the market more fragile and more sensitive to any cracks in the AI narrative."