US borrowing costs hit highest level since 2007, fuel inflation concerns

US government borrowing costs have risen to their highest level since 2007, with the 10-year Treasury yield briefly climbing to 5.04% as a sharp rise in oil prices intensifies concerns about inflation.

The yield, which has since eased, is closely watched as a benchmark for government borrowing costs and influences interest rates across the wider economy.

Government bond yields have been rising globally in recent months amid concerns that higher energy prices could fuel inflation and prompt central banks to keep interest rates elevated or raise them further.

The global benchmark oil price rose above $109 a barrel on Tuesday, up from around $86 at the end of August, following renewed concerns over Saudi Arabia's ability to export oil amid rising tensions in the region.

The increase in oil prices has heightened concerns that inflation could remain persistent, potentially complicating monetary policy decisions by the US Federal Reserve.

Investors are anticipating that Federal Reserve Chair Kevin Warsh could raise interest rates to counter inflationary pressures from higher oil prices. US President Donald Trump, however, has consistently argued in favour of lower interest rates to support economic growth.

The US Treasury has also been buying back government bonds in an effort to put downward pressure on Treasury yields. Treasury Secretary Scott Bessent has described the intervention as “successful”.

Higher interest rates and inflation generally lead investors to demand higher yields when lending to governments. Bond yields can also reflect investor perceptions of the risks associated with holding government debt, although they are influenced by several factors including inflation expectations, monetary policy and demand for bonds.

Another factor contributing to higher yields is increased borrowing by technology companies, particularly those investing heavily in artificial intelligence infrastructure.

Major technology firms are raising large amounts of debt to finance data centres and other infrastructure needed for AI development. Increased corporate borrowing can add to competition for capital and push up borrowing costs across debt markets.

Carol Schleif, chief market strategist at BMO Wealth Management, said bond markets had been signalling for weeks that higher interest rates could be required.

She said the rise in borrowing costs had been relatively “orderly” rather than sudden, but warned that yields could remain elevated if geopolitical tensions and high energy prices persist.

The developments come as governments and businesses globally face higher financing costs, while investors assess how prolonged energy-price pressures could affect inflation and the trajectory of interest rates.