Rising oil prices and growing bets on further Federal Reserve tightening are driving the rout. Brent crude climbed above $107 a barrel as hopes faded that the Strait of Hormuz would reopen soon. The Fed raised rates by 25 basis points earlier this month, its first increase since 2023, and markets now price a 70% chance of another hike in October, up from about 65% on Friday and virtually zero at the start of September. Doubts about demand for US debt have also grown since last week's $70 billion auction of five year notes cleared at 5.033% with a 3.1 basis point tail, the second biggest on record. The Treasury has scaled up bond buybacks to contain borrowing costs, accepting $4.08 billion of a $6 billion maximum in its latest operation for 20 to 30 year debt.
Higher yields are pushing up borrowing costs across the economy. The average 30 year mortgage rate jumped to 7.45% last week, the highest since April 2024, and the 30 year Treasury yield has topped 5.5% for the first time since 2004. With US debt at $40.1 trillion, every percentage point increase in borrowing costs adds about $401 billion a year in interest expense, and the government faces roughly $10 trillion in debt sales over the next 12 months.