A 2.9 basis point day carried the 10-year over 5% for the second time since 2007

The benchmark 10-year Treasury yield briefly topped 5% for the first time since 2023 as spiking oil prices threatened to spill over into debt markets; yields later pulled back.

The 10-year Treasury yield rose to 5.01% in the morning before backtracking a few basis points, the highest since Oct. 23, 2023, when it spiked to 5.02% briefly, and beyond that the highest since 2007.

The 10-year US Treasury yield rose as high as 5.014% on the 14th, up 0.029 percentage point from the previous session.

Price indexes running well above the Federal Reserve's 2% target, the US federal government's large budget deficit and heavy corporate bond issuance tied to artificial intelligence infrastructure added further upward pressure on yields.

The two-year yield climbed to 4.679% and the 30-year yield, a reference for mortgage rates, reached 5.386%; yields later retreated as some bargain hunting emerged.

After Saudi Arabia shut down its East-West Pipeline, a key route for crude shipments bypassing the Strait of Hormuz, November Brent crude futures rose to about $108 a barrel.

Brent crude prices jumped as high as 4% on Monday to nearly $110 a barrel, the highest since May.

Monday's milestone capped a surge of more than 100 basis points since just before the Iran war began in late February, when the 10-year rate was below 4%.

"After several years in which inflation has run above target, it has become harder for policymakers to 'look through' the otherwise temporary effects of higher inflation caused by supply shocks," Neil Shearing, group chief economist at Capital Economics, said in a note on Monday.

"More importantly, in a world of high public debt and large fiscal deficits, there is a potential feedback loop through the bond market that could make a difficult situation considerably worse," Shearing said.

Shearing said that for now the US is not yet in a self-fulfilling fiscal crisis because nominal GDP growth is still outpacing the cost of servicing debt.

"In fact, there is a good case to be made that the key risk from a global macro perspective is less the initial shock than the feedback loop it could set in motion," Shearing wrote.

The Federal Reserve is widely expected to hike rates on Wednesday, with other central banks likely to follow, and some on Wall Street see a total of three rate hikes from the Fed.

US inflation has exceeded the Fed's 2% target for more than five years, and policymakers are less willing to wait and see if prices will cool.

"But that 5% is not high when compared to periods before the Fed's financial repression wrecked the bond market," Wolf Richter wrote.

5% was considered normal to low in the decades before the Fed's financial repression began in 2008, during which it purchased trillions of dollars in Treasury securities and MBS with newly created money.

Bond yields across Europe and Asia jumped, joining US Treasuries.

The intraday high of 5.014% is 1.4 basis points above 5%.

The war is in its seventh month, with little evidence of diplomatic progress toward fully reopening the Strait of Hormuz.

The implied probability of no hike fell from 12.7% to 7.7%, a reduction of about two-fifths.

Tanker traffic through the Strait of Hormuz is well below prewar levels, and US oil reserves, already the lowest in over 40 years, must keep getting drained.

Iran-backed Houthi rebels have seized control of the Bab al-Mandab Strait, which had served as a bypass for Saudi oil around the Strait of Hormuz.

In a Financial Times op-ed last week, Rockefeller International Chairman Ruchir Sharma warned the AI bubble could pop when the 10-year yield "decisively breaches" 5%, which has been the upper end of its range since the dotcom era.

Sharma wrote that hyperscalers will likely issue fewer bonds to finance their spending and will also have more trouble issuing new equity, as yields above 5% have historically been a headwind for stocks.

Sharma noted the US is much more addicted to debt today, with the burden exceeding 100% of GDP.

"As a result, debt-servicing costs are much higher now," Sharma wrote.

Tech stocks sold off on Monday, led by chipmakers that had been riding the wave of hyperscaler spending.

The last time the 10-year hit 5.02%, on Oct. 23, 2023, it came after a six-month 170 basis-point surge; the floodgates of demand opened at that yield, sellers stopped selling, and the yield fell 19 basis points intraday to 4.83% and by over 120 basis points by year-end, to 3.79%.

The 30-year yield at 5.386% sits 37.2 basis points above the 10-year at 5.014%.

The two-year at 4.679% sits 33.5 basis points below the 10-year at 5.014%.

Three hikes at the 0.25 percentage point increment futures are pricing come to 75 basis points on the policy rate.

The 0.029 percentage point move on the day was under 3% of the more than 100 basis point rise since late February.

From 5.02% on Oct. 23, 2023 to 3.79% at year-end is a decline of 1.23 percentage points.