Why are US bond yields rising? Is it the Iran war or a stronger economy?
Rising Treasury Yields Spark Debate Over Inflation, Oil and Economic Momentum
Bharatmorning.com – Higher US Treasury yields have become a focal point for investors, borrowers and policymakers as inflation remains elevated and the conflict involving Iran continues to affect energy markets. Treasury Secretary Scott Bessent has argued that the increase in yields is largely a temporary response to the oil-price shock connected to the war, while several Federal Reserve officials see a more durable explanation: an economy that is still expanding with considerable strength.
The distinction matters well beyond financial markets. Long-term Treasury yields influence mortgage costs, business borrowing and the wider price of credit. If yields are being driven mainly by an energy disruption, they could ease when oil markets stabilize. If they reflect stronger growth and persistent inflation pressures, borrowing costs may remain higher for longer.
Bessent links higher yields to energy prices
Bessent has said the US economy is improving, but he expects both inflation and bond yields to retreat after the Iran conflict ends. In his view, the recent increase in headline inflation has been shaped principally by more expensive energy, rather than by broad-based and lasting price pressures across the economy.
Headline inflation stands near 3.5%, he said, while core inflation is closer to 2.3%. Core measures exclude food and energy because those categories can move sharply over short periods. That gap is central to Bessent’s assessment: he believes the energy-related portion of inflation should fade once the conflict no longer disrupts oil markets.
If energy prices decline, Bessent expects inflation readings to cool and long-dated Treasury yields to follow. He has suggested yields could move back toward levels seen in mid-February, before the conflict began. A fall in long-term yields could also help reduce mortgage rates, offering some relief to prospective homebuyers and households refinancing loans.
Still, Bessent has not offered a timetable for the end of the conflict. His argument rests on the expectation that the energy shock is temporary and that interest-rate pressures will lessen after oil prices normalize.
Private-sector hiring supports the administration’s view
The Treasury secretary also pointed to employment trends as evidence that underlying economic conditions are becoming more favorable. Roughly 1 million private-sector jobs have been added this year, while government employment has declined by about 300,000 positions.
That composition is important to Bessent because private hiring can support wage growth and consumer demand. He has maintained that the economy may be entering a period of stronger expansion rather than nearing a slowdown. From this perspective, recent growth has only begun to show up in the data.
A stronger economy can itself push Treasury yields upward. Investors may demand higher returns on long-term bonds when they expect growth to remain firm, inflation to stay above target or interest rates to remain elevated. That creates the central disagreement in the current debate: whether yields are reacting primarily to the war-related oil shock or to confidence in the resilience of the US economy.
Economists warn that inflation is eroding pay
Other economists are less convinced that workers are experiencing broad wage gains after accounting for inflation. Gregory Daco, chief economist at EY, noted that average hourly earnings rose at a 3% annualized pace in September, the weakest rate of the post-pandemic period.
Daco expects the September Consumer Price Index to show inflation of roughly 3.6%. If that happens, wage growth may not be sufficient to preserve workers’ purchasing power. He projects that inflation-adjusted, or real, wages could decline by 0.6% from a year earlier.
Such a result would mark a sixth consecutive month of falling real wages. When pay does not keep up with the cost of goods and services, households can buy less even if nominal wages continue to rise. This may eventually restrain spending, especially for families that have limited savings or face high costs for fuel, food, housing and credit.
Stock-market gains have continued to provide support for consumer spending in some parts of the economy. But Daco has warned that weaker household income could curb the pace of spending growth as 2027 approaches. Consumer demand is particularly significant because household purchases account for a large share of overall US economic activity.
Concerns grow over the outlook for real wages
Joe Brusuelas, chief economist at RSM, also sees evidence that the economy strengthened during the third quarter. However, he does not believe inflation has cooled sufficiently to remove pressure from households. Higher prices, particularly for energy, can reduce the effective value of workers’ earnings.
Brusuelas expects the next CPI release to indicate that real wage growth has been flat or negative since the Iran war began. In that scenario, energy costs would be absorbing a larger portion of household budgets and reducing the money available for other purchases.
He expects this deterioration in purchasing power to become a modest drag on growth in the final quarter of 2026 and the opening months of 2027. The concern is not necessarily an abrupt collapse in consumer activity, but a gradual slowdown as households adjust their budgets to higher prices.
Federal Reserve officials emphasize economic resilience
Federal Reserve officials have highlighted a different force behind rising long-term yields: sustained economic strength. Fed Chairman Kevin Warsh has described economic momentum as the main factor influencing long-term Treasury rates.
Cleveland Fed President Beth Hammack has pointed to solid recent growth figures, stronger-than-expected corporate earnings and healthy profits. These signs can lead markets to anticipate continued expansion, prompting investors to reassess the likely path for inflation and interest rates.
Philadelphia Fed President Anna Paulson has similarly described the economy as resilient despite tariffs and higher oil prices. Her view underscores why Treasury yields can rise even when an energy shock is temporary: investors may see enough strength in consumers and businesses to expect growth to continue.
For households, the outcome of this debate will be visible in everyday borrowing costs. A rapid decline in energy prices could ease inflation and bring down yields, helping mortgage borrowers and businesses seeking financing. But if economic demand remains robust and price pressures persist, long-term rates may stay elevated even after oil markets calm.
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