Oil prices climbed in Monday’s Asian session after President Trump rejected Iran’s latest proposal to reopen the Strait of Hormuz, reigniting inflation concerns and triggering a fresh selloff in U.S. Treasuries. The rate-sensitive 2-year Treasury yield rose 5 basis points to 4.90%, while the 10-year yield climbed 4 basis points to 5.20%. Sovereign bonds in Japan and Australia fell in sympathy with the U.S. move. “Continued hawkish signals from the Federal Reserve, combined with oil holding above $100 a barrel, are the key factors driving the market’s bearish stance on bonds,” said Damien McColough, head of fixed income research at Westpac. Here’s what’s behind the rejection, why bond markets are reacting so sharply, and what it could mean for crypto and broader risk assets.
Monday’s Move in Numbers
| Metric | Move |
|---|---|
| 2-year U.S. Treasury yield | +5 bps to 4.90% |
| 10-year U.S. Treasury yield | +4 bps to 5.20% |
| Brent crude (recent range) | ~$106/barrel, +17% month-to-date |
| WTI crude (recent range) | ~$93–94/barrel |
| Japanese and Australian sovereign bonds | Fell in sympathy with U.S. Treasuries |
| Conflict start date | February 28, 2026 (U.S.-Israel strikes on Iran) |
What Iran Proposed, and Why Trump Rejected It
Iranian Foreign Minister Abbas Araghchi had offered to reopen the Strait of Hormuz — the narrow waterway through which roughly a fifth of global oil supply normally transits — within seven days, and to restart nuclear negotiations with Washington, in exchange for the U.S. ending its military actions, lifting its naval blockade of Iranian ports, and releasing frozen Iranian assets. President Trump rejected the conditional offer, reportedly telling reporters that Tehran was “desperate to make a deal” and signaling that Washington was not prepared to meet Iran’s terms. Talks were expected to continue in some form, but with neither side showing clear signs of softening its position, markets priced in an extended period of disrupted shipping through one of the world’s most important energy chokepoints.
Why the Strait of Hormuz Matters So Much to Oil Markets
The Strait of Hormuz has been effectively closed to normal commercial traffic since the conflict escalated in late February 2026, with daily vessel transits collapsing from a historical range of 120-140 ships to only a handful. Because the strait normally carries such a large share of global crude and refined product flows, any prospect of a durable reopening tends to pressure oil prices lower, while a rejection of terms — as happened here — removes that potential relief valve and reinforces expectations that constrained supply, and the resulting upward pressure on prices, will persist. Brent crude has climbed roughly 17% over the past month alongside these developments, and diesel prices have also been pushed toward record levels as refiners contend with the disrupted flow of crude from the Gulf region.
How Oil Prices Feed Into the Treasury Selloff
The connection between oil prices and Treasury yields runs through inflation expectations. Sustained higher oil prices raise the cost of energy embedded throughout the economy — transportation, manufacturing, and heating costs all rise when crude stays elevated — which feeds directly into consumer and producer price indexes. For bond investors, higher realized or expected inflation erodes the future purchasing power of a bond’s fixed interest payments, making existing bonds less attractive at their current yields and pushing prices down (and yields up) until the market reaches a new equilibrium. That dynamic has been compounding with an already hawkish Federal Reserve: rate hike expectations for the Fed’s upcoming meeting have been running high, and each fresh sign that inflation risk is building on the energy side gives the Fed additional justification to keep policy tight for longer, which further pressures the front end of the Treasury curve — exactly the pattern reflected in the 2-year yield’s sharper 5-basis-point move compared to the 10-year’s 4-basis-point increase.
Why the 2-Year Yield Is the One to Watch
The 2-year Treasury yield is generally considered the most direct market proxy for near-term Federal Reserve policy expectations, since a bond with such a short maturity is highly sensitive to where the Fed is expected to set short-term interest rates over the next one to two years. Its rise to 4.90% — outpacing the 10-year’s move — signals that markets are specifically pricing in a more hawkish near-term Fed path rather than simply a broad-based rise in long-run inflation expectations. The 10-year yield, at 5.20%, reflects a blend of near-term policy expectations and longer-run growth and inflation assumptions, and its more modest move suggests the market’s primary adjustment right now is concentrated on how aggressively the Fed will act in the coming months rather than a fundamental repricing of long-term economic conditions.
The Global Bond Market Ripple Effect
U.S. Treasury market moves rarely stay contained to U.S. markets alone, and Monday’s session illustrated why: sovereign bonds in Japan and Australia both declined in sympathy with the Treasury selloff. Global fixed income markets are tightly linked through currency hedging flows, cross-border capital allocation, and the fact that U.S. Treasuries serve as the world’s benchmark risk-free asset against which other sovereign bonds are priced. When U.S. yields rise sharply on a specific catalyst like this one, international bond investors often reassess their own domestic rate expectations and risk premiums in tandem, particularly in developed markets like Japan and Australia that maintain deep financial ties to U.S. capital markets. This kind of synchronized global bond selloff tends to amplify the tightening effect on financial conditions worldwide, beyond what a purely domestic U.S. rate move would produce on its own.
What This Means for Risk Assets, Including Crypto
Rising Treasury yields typically create headwinds for risk assets broadly, including equities and cryptocurrencies, because higher yields raise the discount rate applied to future cash flows and give investors a more attractive risk-free alternative to compete with speculative or growth-oriented investments. Bitcoin and the broader crypto market have shown a mixed but generally cautious pattern through this conflict: prices have periodically pulled back on escalation headlines tied to Iran and oil, while showing resilience during pauses in hostilities. With yields now pushing toward multi-decade highs alongside sustained oil price pressure, the combination of tightening financial conditions and elevated macro uncertainty is a backdrop that has historically made risk assets more volatile and more sensitive to incremental headlines, whether those headlines point toward de-escalation or further conflict.
Historical Context: Oil Shocks and Bond Markets
Geopolitically-driven oil price spikes have a long history of triggering bond market selloffs, dating back to the oil shocks of the 1970s and recurring during Gulf conflicts in subsequent decades. What distinguishes the current episode is the combination of an already hawkish Federal Reserve policy stance with a supply-side energy shock, rather than a demand-driven inflation problem the Fed could address more straightforwardly through the traditional tools of monetary policy. Supply shocks are historically harder for central banks to manage because raising interest rates does nothing to increase oil supply or reopen a blocked shipping route — it only works by suppressing broader demand across the economy, which raises the risk of tightening policy into a growth slowdown if the energy disruption proves prolonged.
The Fed’s Difficult Position: Inflation Risk vs. Growth Risk
The Federal Reserve now finds itself navigating a genuinely difficult trade-off. On one hand, sustained oil-driven inflation pressure argues for keeping monetary policy tight, or even tightening further, to prevent elevated energy costs from feeding into broader price expectations across the economy — a risk central banks are historically wary of, since unanchored inflation expectations are far harder to reverse once they take hold. On the other hand, a supply-driven energy shock combined with higher borrowing costs across the economy raises the risk of slowing growth more than the Fed might intend, since businesses and consumers face the double burden of higher energy costs and higher financing costs simultaneously. This is precisely the dilemma that made 1970s-style oil shocks so difficult for central banks to manage, and it’s the same tension market participants are now pricing into the Treasury curve: a Fed that leans further hawkish to fight energy-driven inflation risks tightening into a slowdown, while a Fed that holds off risks letting inflation expectations drift higher.
How Currency Markets Are Responding
The combination of higher U.S. yields and hawkish Fed positioning has also been supportive of the U.S. dollar, since higher yields on U.S. assets tend to attract capital flows seeking better risk-adjusted returns relative to lower-yielding currencies. A stronger dollar creates its own set of cross-currents for global markets: it can help offset some of the domestic inflationary impact of higher oil prices for U.S. consumers, since oil is priced in dollars globally, but it simultaneously makes dollar-denominated debt more expensive to service for emerging market borrowers and can pressure commodity prices for buyers transacting in other currencies. For crypto markets specifically, a stronger dollar environment has historically coincided with more cautious risk sentiment, adding another layer to the already complex set of forces — oil prices, Fed policy, and geopolitical risk — currently at play.
Risks and Uncertainties Ahead
- No clear resolution timeline: with both sides holding firm on incompatible terms, the Strait of Hormuz disruption could persist for an extended and unpredictable period
- Fed policy path remains data-dependent: further hawkish signals or upside inflation surprises could push yields even higher, while any de-escalation could quickly reverse the current move
- Contagion risk to global bond markets: continued U.S. yield increases could pressure other sovereign bond markets further, tightening global financial conditions beyond the U.S.
- Diesel and refined product shortages: beyond crude oil itself, constrained refining capacity and disrupted product flows could create additional, harder-to-predict price pressures
- Risk asset volatility: equities and crypto markets remain sensitive to incremental headlines on the conflict, meaning sharp moves in either direction remain possible on short notice
What to Watch Next
- Any further statements from Trump, Iranian officials, or mediators on the status of Hormuz negotiations
- Upcoming U.S. inflation data, which could either validate or ease current hawkish Fed pricing
- The Federal Reserve’s next policy meeting and any updated guidance on the expected pace of rate moves
- Oil price trends, particularly whether Brent and WTI continue climbing or stabilize near current levels
- Crypto and equity market reactions to further Treasury yield moves, as a gauge of how much further risk-asset repricing this macro backdrop could drive
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FAQ: Oil, Treasury Yields, and the Hormuz Standoff
Why did Trump reject Iran’s Hormuz Strait proposal?
Iran’s offer was conditional on the U.S. ending military action, lifting its naval blockade, and releasing frozen Iranian assets. Trump rejected these terms, reportedly stating Iran was “desperate to make a deal,” signaling Washington was not willing to meet Tehran’s conditions.
Why do rising oil prices push Treasury yields higher?
Higher oil prices raise inflation expectations throughout the economy, which erodes the real value of a bond’s fixed payments and pushes bond prices down and yields up, while also reinforcing expectations that the Federal Reserve will keep interest rates higher for longer.
Why did the 2-year yield rise more than the 10-year yield?
The 2-year yield is more directly tied to near-term Federal Reserve policy expectations, so its sharper move suggests markets are specifically pricing in a more hawkish near-term rate path rather than a broader shift in long-run growth or inflation assumptions.
How does this affect crypto markets?
Rising Treasury yields typically pressure risk assets, including cryptocurrencies, by raising the discount rate on future cash flows and offering a more attractive risk-free alternative. Bitcoin and other crypto assets have shown periodic pullbacks on escalation headlines throughout this conflict, alongside resilience during periods of de-escalation.
Is the Strait of Hormuz still closed to shipping?
Yes, as of the most recent reporting, commercial traffic through the strait remains a small fraction of its pre-conflict levels, with negotiations over reopening terms still unresolved.
This article is for informational purposes only and does not constitute financial advice. Geopolitical developments can change rapidly; always verify current market conditions before trading. Data referenced from Reuters via Investing.com, CNBC, and Bitcoin.com News, as of September 28, 2026.
