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The benchmark 10-year Treasury yield climbed Tuesday to its highest level in 19 years as oil prices surged during the Iran conflict and expectations mounted that the Federal Reserve would raise interest rates Wednesday.

The milestone carries broad economic significance because the yield serves as a benchmark for consumer loans and corporate funding.

The 10-year yield was last more than 3 basis points higher at around 5%. Earlier in the session, it reached 5.041%, its highest level since July 2007.

One basis point equals 0.01 percentage point. Treasury yields and prices move in opposite directions, meaning the sharp rise in yields came alongside pressure on bond prices.

Longer maturity government debt also moved sharply. The 30-year Treasury bond yield, which is more sensitive to geopolitical risks, rose 4 basis points to 5.368% after touching 5.401%, its highest level since June 2007.

The 2-year Treasury note yield gained more than 1 basis point to 4.648%. It had earlier climbed as high as 4.688%, marking its highest level since July 2024.

The moves arrived at the start of the Fed’s two day policy meeting. Markets were assigning higher odds to a quarter point rate increase when the meeting concludes Wednesday because August inflation remained well above the central bank’s 2% target.

Traders were pricing in a greater than 92% probability that the Fed would raise rates by 25 basis points at its latest meeting, according to the CME FedWatch tool.

That expectation added another source of pressure for Treasury prices as investors confronted the possibility of tighter monetary policy.

“U.S. 10-year treasuries are highly sensitive to inflation expectations, and with inflation gauges still above the Fed’s target of 2%, we believe this tight correlation will likely persist for a while,” said Jonathan Liang, Standard Chartered’s CIO of fixed income and FX.

Oil prices have become a central force in the Treasury market as higher energy costs feed into inflation expectations.

Experts told CNBC that the close relationship between oil and Treasurys could generate further upward pressure on yields if crude prices remain elevated.

The one month rolling correlation between front month West Texas Intermediate crude and the 10-year Treasury yield has risen to 0.96, according to BMO Capital Markets. That reading reflects an unusually tight relationship between movements in crude and the benchmark government bond yield.

WTI crude advanced again Tuesday and moved above $102 a barrel as the Iran conflict continued and the Strait of Hormuz remained essentially blocked.

Oil had surged during the onset of the war earlier in the year before falling below $70 a barrel in July.

That July decline followed expectations that an MOU signed by the U.S. and Iran would lead to an easing of the conflict.

Prices later rebounded after Iran and the U.S. restarted attacks and oil inventories declined.

Diesel gasoline, which is used by trucks and other transport critical to the economy, recently exceeded $6 a gallon.

That price increase added to inflation concerns already weighing on the bond market and expectations for Federal Reserve policy.

“Speaking simplistically, higher oil prices lead to higher inflation expectations and vice versa,” said Steve Sosnick, chief strategist at Interactive Brokers.

His assessment captured the direct inflation concern now driving the unusually close relationship between energy prices and Treasury yields.

“Normally, the relationship isn’t as clean as it is now, but the geopolitical drivers behind the price of oil and global inflation are so prominent that the normally modest correlation has become much tighter,” Sosnick told CNBC via email. He added, “As long as oil prices remain firm and continue to drift higher, this will add pressure to interest rates.”

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.