Treasuries fall as rising oil prices raise inflation fears and rate hike bets

US Treasury prices dropped sharply on September 9 as surging oil prices reignited inflation concerns. The two-year yield climbed to 4.42%, up 3 basis points and its highest reading since July 2024, while the ten-year yield hovered near 4.81%. The catalyst is crude oil. Brent briefly topped $100 per barrel for the first time since July, while West Texas Intermediate approached $95. Both benchmarks moved sharply higher following US airstrikes on Iranian oil tankers, an escalation in Middle East tensions that threatens to constrain global supply.

This isn’t the first oil shock of 2026. Back in March, crude spiked to $126 per barrel before pulling back as diplomatic channels briefly cooled tensions. That episode pushed inflation expectations higher and complicated the Federal Reserve’s messaging for months. The current surge arrives just ahead of the September FOMC meeting.

Traders have responded by increasing the odds of a Federal Reserve rate hike. Fed Chair Kevin Warsh has made it clear that bringing inflation to heel remains the central bank’s top priority. Warsh has also pointed to other inflationary pressures beyond oil: tariffs continue to push up import costs across multiple categories, while surging demand related to artificial intelligence infrastructure has added its own upward pressure on prices.

What the yield curve is saying

The two-year yield is particularly sensitive to anticipated Fed policy changes because it reflects where traders think short-term rates are headed over the next 24 months. Its jump to 4.42% signals that the market is pricing in tighter monetary policy, not looser. With the two-year at 4.42% and the ten-year at 4.81%, the curve is positively sloped by roughly 39 basis points.

Geopolitical risk as the wild card

The US airstrikes on Iranian oil tankers represent a significant escalation that goes beyond short-term price swings. Iran is a major oil producer, and any sustained disruption to its exports, or to shipping routes through the Strait of Hormuz, could keep crude elevated for weeks or months. The March spike to $126 per barrel demonstrated how quickly prices can move when supply disruptions collide with steady demand. While prices retreated from that peak, they never fully returned to the sub-$80 levels that characterized much of late 2024.

The September FOMC meeting will be the next major inflection point. If Warsh and his colleagues signal that a rate hike is on the table, the Treasury selloff could deepen further.

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