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Why are US bond yields rising? Is it the Iran war or a stronger economy?
US bond yields are rising as Iran war-driven oil prices push inflation higher, while strong US economic growth also keeps pressure on Treasury yields.
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US Treasury Secretary Scott Bessent says the economy is getting stronger, and he expects inflation and bond yields to fall once the Iran conflict ends. Bessent said the current rise in inflation and bond yields is largely linked to the energy shock caused by the war.
Bessent said headline inflation is around 3.5%, but underlying inflation is much lower. He said core inflation, which removes volatile food and energy prices, is about 2.3%. Bessent believes the energy shock from the Iran conflict is temporary. He said energy prices should fall once the conflict ends, which could also bring inflation and longer-term bond yields lower.
US jobs are getting stronger
Bessent also pointed to job growth as a sign that the US economy is strengthening. He said about 1 million private-sector jobs have been created this year, while government employment has fallen by about 300,000 jobs. He said private-sector job growth is important because it supports real wage growth. Bessent argued that the economy is only beginning to show stronger growth and that this could continue, according to Yahoo Finance.
But economists disagree with Bessent on how strong the wage picture really is. Gregory Daco, chief economist at EY, said average hourly earnings increased at an annualized rate of 3% in September, the slowest pace of the post-pandemic cycle.
Inflation may stay high
Daco expects inflation to remain high. He expects the September Consumer Price Index (CPI) to show inflation at about 3.6%. That could mean workers are losing purchasing power. Daco expects inflation-adjusted wages, or real wages, to fall 0.6% year over year.
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Daco said this would mark the sixth straight month of falling real wages. This means workers' pay is not keeping up with rising prices. Daco expects this income pressure to slow consumer spending. He said stock-market gains are still helping support overall consumer spending, but weaker household income could limit spending growth going into 2027, according to Yahoo Finance.
Iran war puts pressure on wages
RSM chief economist Joe Brusuelas also agrees that the US economy strengthened during the third quarter. However, he does not believe inflation is easing enough and said higher prices are putting pressure on wages and household purchasing power.
Brusuelas expects the next CPI report to show that real wage growth has been flat or negative since the Iran war began. This suggests that higher prices, especially energy costs, are eating into workers' income. He expects weaker real wages to start hurting economic growth. Brusuelas said falling purchasing power could become a mild drag on the US economy in the final quarter of 2026 and early 2027.
Why are bond yields rising?
The debate over bond yields comes down to two main explanations: higher oil prices caused by the Iran war, or a stronger US economy. Bessent puts more weight on the energy shock, while several Federal Reserve policymakers say economic strength is a major reason yields are rising, according to Yahoo Finance.
Oil prices may push yields down
Bessent believes higher energy prices are pushing up long-term Treasury yields. He said the rise in yields is linked to higher headline inflation caused by the Iran conflict and the resulting increase in energy prices.
Bessent expects long-term Treasury yields to fall after the war ends. He said yields could return toward the levels seen in mid-February, before the conflict began. He also expects mortgage rates to come down if energy prices fall. Bessent said he does not know when the conflict will end, but believes energy prices and interest rates will be lower after it does.
Fed sees a strong economy
Federal Reserve officials, however, see a stronger economy as an important reason for higher long-term yields. Fed Chairman Kevin Warsh recently said economic strength is the primary driver of long-term Treasury yields.
Cleveland Fed President Beth Hammack also pointed to strong economic growth. She said recent growth numbers have been solid and that company earnings and profits have been coming in above expectations. Hammack said markets are starting to price in continued economic strength. Signs that companies and the wider economy remain resilient are helping push expectations for stronger growth.
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AI and spending support growth
Philadelphia Fed President Anna Paulson also sees a resilient US economy. She said the economy is showing signs of gaining momentum despite tariffs and higher oil prices. Paulson pointed to strong consumer spending as one sign of economic strength. She also said investment linked to the artificial intelligence boom is supporting the economy, according to Yahoo Finance.
The US labor market also remains stable, according to Paulson. This gives investors another reason to believe economic growth can continue despite higher energy costs. Fed Vice Chair Philip Jefferson also expects the economy to remain resilient. He said the economy can continue growing even with higher prices.
Jefferson expects AI investment to remain an important source of growth. He said investment in AI should continue supporting the economy this year. Jefferson expects near-term real GDP growth to remain around the same pace as in the first half of the year. That points to continued economic resilience rather than a sharp slowdown, according to Yahoo Finance.
So, why are US bond yields rising? There is no single answer. Higher oil and energy prices linked to the Iran war are pushing inflation higher, but strong economic growth, company earnings, consumer spending and AI investment are also supporting higher yields.
If the Iran war ends and oil prices fall, bond yields could come down. This is the view held by Bessent because lower energy prices would reduce some of the inflation pressure. But yields may not return completely to pre-war levels if the US economy remains strong. If investors continue to expect strong growth, solid company earnings, stable employment and high investment, long-term Treasury yields could stay elevated.
The key question for markets is therefore whether the rise in yields is mainly temporary or reflects a stronger US economy. If the Iran conflict is the main reason, yields could fall sharply when oil prices drop. If stronger growth is the bigger reason, yields could remain high even after the war ends.
