Four weeks before the November 3 midterms, the average US price of on-highway diesel stands at about USD 6.38 a gallon, according to the Energy Information Administration (EIA).

A week earlier it hit USD 6.53, an all-time high that beat the previous record of USD 5.81 set in June 2022 after Russia invaded Ukraine.

Diesel cost about USD 3.81 a gallon in late February, just before the United States and Israel went to war with Iran. It has since risen by roughly two-thirds, far outpacing petrol, which the EIA puts at about USD 4.47. The gap matters.

Petrol is mostly a consumer fuel. Diesel is a producer fuel, powering the trucks that stock supermarkets, the combines bringing in the corn and soybean harvest, freight trains, construction equipment and backup generators. When it gets dearer, the cost travels through almost everything Americans buy.

A crisis made abroad

The roots of the squeeze lie far from American forecourts. The closure of the Strait of Hormuz took about a fifth of the world’s oil off the market, and the Middle East supplies a disproportionate share of the crude used to make diesel, which is why diesel has climbed faster than petrol.

Brent crude broke through USD 100 a barrel in early September as US and Iranian strikes in the strait intensified.

The war in Ukraine has compounded the damage. Ukrainian drone strikes on Russian refineries have removed between 800,000 and 1 million barrels a day of diesel from the market, according to S&P Global Energy, and Moscow has extended its own diesel export ban until the end of October.

Chinese refiners have reportedly suspended fuel exports for October to protect domestic stocks.

That leaves the United States in an odd position. It is the world’s largest diesel exporter, shipping about 1.5 million barrels a day this year against domestic use of about 4.1 million barrels a day.

Its refineries were running at roughly 97% of capacity in mid-September. Yet because diesel is priced on a global market, a shortage in Rotterdam or Singapore lifts the price in Iowa too.

The energy security paradox
For an administration built around “energy dominance”, the episode exposes an uncomfortable truth. Producing more oil than anyone else does not shield American consumers from a global shortage of refined fuel.

Domestic distillate stocks, which cover diesel and heating oil, fell to about 106 million barrels in early September, down from about 121 million a year earlier and the lowest level for the time of year since records began in 1982.

The buffers are thin. The Northeast Home Heating Oil Reserve, the only federal stockpile of ready-to-use distillate, holds about 1 million barrels, a sliver of what the region burns in a cold winter.

Washington has already pledged 172 million barrels from the Strategic Petroleum Reserve to a coordinated International Energy Agency (IEA) release in March, and it has repeatedly waived the Jones Act, the century-old law reserving domestic shipping for US vessels, so foreign tankers can move fuel between American ports.

Washington then turned the threat into leverage, asking European governments to release around 120 million barrels of diesel from their strategic reserves over 180 days or risk losing American supply. The UK alone relies on the United States for about 30% of its diesel.

Europe gave ground, though not all of it. On October 2, G7 leaders agreed to a coordinated IEA release of 100 million barrels of diesel and crude over four months, with a substantial diesel release frontloaded into the first 20 days, and pledged to avoid energy export restrictions among themselves.

Trump hailed the deal and said an export ban “was never really on the table”.

Economists had warned that a ban would backfire. Refiners cannot simply stop making diesel without cutting output of petrol and jet fuel, and the American Petroleum Institute cautioned that most Americans would end up paying more.

Analysts pointed to Richard Nixon’s 1973 soybean export ban, which pushed buyers towards Brazil for good. The deeper cost would have been America’s reputation as a dependable supplier.

From the pump to the shopping basket
Energy prices in the consumer price index were 16.3% higher in August than a year earlier, holding headline inflation at 3.4%.

Producer prices took a sharper hit, with diesel jumping 24.1% in August alone.

On September 16, the Federal Reserve raised interest rates for the first time since 2023, lifting its benchmark to a range of 3.75% to 4%, and most policymakers expect at least one more increase before the year ends.

Trucking, which moves most American goods, is where the shock lands first.

Dry van spot rates paid to carriers were 34% higher year on year in mid-September, according to DAT Freight & Analytics.

In Nevada, the state truckers’ association says fuel surcharges are so steep that a USD 1,000 haul can now cost USD 1,900, and fuel has outpaced every other expense its members face.

The sell-off has affected long-duration Treasury investments particularly sharply. BlackRock’s iShares 20+ Year Treasury Bond ETF touched its lowest intraday level since its launch in 2002, underlining the pressure on investors holding longer-maturity government debt.

The rise in yields is significant for asset allocation. When government bonds offer higher returns, they become more competitive with equities, particularly shares whose valuations depend on expectations of strong earnings growth far into the future.

Pressure on equities
US stock markets have come under pressure as investors weigh higher borrowing costs against elevated equity valuations. The S&P 500, Dow Jones Industrial Average and Nasdaq Composite all closed lower on Monday.

The S&P 500 fell 0.5%, while the Dow declined 0.3 per cent and the Nasdaq dropped 0.6%. The declines reflected both the rise in Treasury yields and weakness in technology and artificial intelligence-related shares.

Higher yields can weigh on growth stocks because future earnings are discounted at a higher rate.

The impact is not limited to Wall Street. Higher US Treasury yields can influence capital flows globally, affecting emerging-market currencies, government bonds and equity markets. Countries and companies that borrow in dollars may face additional pressure if US yields rise alongside a stronger dollar.

The treasury seeks to contain costs
US Treasury Secretary Scott Bessent has made long-term borrowing costs a key measure of the administration’s economic success. The Treasury has responded by increasing bond buybacks and considering measures to manage the supply of longer-dated debt.

The administration has also encouraged Japan to curb Treasury sales and opened the door to potentially reducing issuance of long-maturity bonds.

However, the measures have so far had limited effect. The 10-year yield continued to climb despite the Treasury’s efforts, suggesting that investors remain focused on inflation, fiscal deficits and the broader supply-demand balance in the bond market.

The challenge is particularly acute because higher yields increase the government’s cost of servicing its debt.

Fed decision in focus
The Federal Reserve’s decision this week will be closely watched for clues about the future path of interest rates. Investors will assess whether policymakers view the oil-driven inflation risks as temporary or as a threat to broader price stability.

A central bank that signals a willingness to keep rates higher could reinforce pressure on the long end of the Treasury curve. Conversely, reassurance that inflation remains under control could encourage bond buying and ease yields.

For now, the 5% threshold has become a test of investor confidence. If yields remain above that level, borrowing costs could stay elevated across the economy, increasing pressure on businesses, households and governments.

The breach does not automatically signal an economic crisis. But it indicates that the bond market is demanding greater compensation for inflation uncertainty, heavy borrowing and the risks surrounding the global economic outlook.

As investors wait for the Federal Reserve’s next move, the question is whether 5 per cent will mark a temporary spike or the beginning of a more sustained period of higher long-term borrowing costs.

As per the economists, the reports, if taken together, point to an acceleration in overall economic growth in the Q3. However, the Fed’s current focus should be on fighting inflation, as the crucial midterm elections are approaching.

“The July consumer spending and core durable goods shipments data point to a strong real GDP (gross domestic product) growth rate in Q3 that looks to be running at least 3%. That figure would be double the second quarter’s unrevised annualized growth rate of 1.5%,” said Kathy Bostjancic, chief economist at Nationwide.

All eyes will be upon Fed Chairman Kevin Warsh, who will deliver his debut keynote speech to the Kansas City (State of Missouri) Fed’s annual economic symposium in Jackson Hole, Wyoming, this weekend. Investors, particularly those operating in the inflation-wary government bond market, will be looking forward to the vent.

“As Jackson Hole beckons, the Fed’s challenge is clear: It still has considerable ground to cover before markets see 2% inflation as a credible outcome rather than a distant aspiration,” said Olu Sonola, head of US economics at Fitch Ratings.

Coming back to the July data, the “Personal Consumption Expenditures Price Index” increased 3.7% in the 12 months through the month, unchanged from June, the Commerce Department’s Bureau of Economic Analysis said.

At 0.2% in July, the month-over-month consumption figure was also higher than expected after falling 0.1% in June, which had been the weakest reading since April 2020.

Excluding energy and food prices, so-called core PCE (Personal Consumption Expenditures), which Fed officials use as a guidepost for inflation’s underlying run rate, held steady at 3.3% on the year while rising to 0.2% on the month from 0.1% in June.

Immediately after the data’s publication, Fed funds futures prices reflected about a 40% probability of an interest rate hike at the central bank’s September 15-16 meeting, versus about 36% right before.

“This is data that supports a hike. The unrounded core PCE was 0.246%, so it barely missed out on rounding to 0.3%. That is a one-month annualized rate (of) nearly 3.0%,” said Omair Sharif, founder and president of forecasting firm Inflation Insights, while interacting with the Reuters.

Annual PCE shot to a three-year high of 4.1% in May after ‌the beginning of the Iran war, sending energy prices higher as the conflict shut in roughly a fifth of global oil supplies through the strategically important maritime trade route known as the Strait of Hormuz.

More than six months down the line, while the conflict has shown no signs of a final resolution, oil prices and inflation more widely have retreated from mid-spring highs, as the warfare moves on from the battlefield to the economic arena, with Washington unveiling its sanctions package against Tehran.

Talking about the Fed’s monetary policy direction, the central bank, in July, left its benchmark interest rate unchanged in the 3.50%-3.75% range, where it has been since December 2025.

However, a growing minority of policymakers still believe that a tighter policy is needed, given that inflation has been above target since February 2021 and will not get to the 2% level without further restraint.

Inflation as measured by PCE peaked at 7.2% in June 2022, and the steepest Fed rate increases ⁠since the 1980s helped put it on a path back toward 2%.

However, President Donald Trump’s second term at the White House began with a flurry of import tariffs on both the United States’ partners and adversaries, drastically changing the situation and leading to a wide range of goods being priced higher. The Iran war has further boosted those price pressures.

The broken trade negotiations between the United States and its second-largest trading partner, Canada, resulted in new levies on USD 20 billion of Canadian imports, which will also increase the pain.

At this backdrop, the BEA has left unchanged its estimate of annualised GDP ⁠growth for the Q2 at 1.5% but revised up consumer spending to 3.4% from the originally reported 3.2%, an indication that the individual consumption that supports two-thirds of American economic activity had held up through the first half of the year.

Business investment remained strong, with continued growth in AI spending negating the tariff warfare-related pressure to some extent.

Growth in final sales to private domestic purchasers, which shows how much consumers and businesses spend on investments and is an important sign of overall private consumption, was revised up to 4.2%, the highest since ⁠Q1 2023, from 3.9%.

Corporate profits jumped by USD 400.9 billion after climbing by USD 74.4 billion in the first quarter. The ratio became the second-largest increase in profits on record, topped only by the third quarter of 2020, and was likely driven by the Trump administration’s corporate tax overhaul that went into effect this year.

Gross domestic income (GDI) rose 2.2% versus 1.2% in the first quarter. The average of GDP and GDI, also known as gross domestic output and considered a better measure of economic activity, grew at a 1.8% rate versus 1.7% in the previous quarter.

Treasury Secretary Scott Bessent has tried to address the immediate market pressure by expanding the department’s buyback program for longer-dated Treasuries. The plan is designed to improve liquidity and reduce the supply of older securities in the market, potentially supporting prices and lowering yields.

But the bond market’s response has been skeptical. The Treasury doubled planned purchases to USD 4 billion per operation, yet long-term yields rose again almost immediately. Analysts cited by AP said the intervention is small relative to the size of the Treasury market and cannot by itself resolve concerns about deficits, inflation, and the government’s borrowing requirements.

The rebound also shows why lower short-term policy rates do not automatically translate into cheaper long-term borrowing. Treasury yields reflect expectations for future interest rates, inflation, and economic growth, as well as the supply of government debt and demand from domestic and overseas investors.

The Federal Reserve is adding to that uncertainty. Minutes from its July meeting showed that many officials believed higher rates could be necessary if inflation remains elevated. The Fed kept its benchmark rate around 3.6%, but the debate has become more complicated as energy prices rise and inflation remains above the central bank’s 2% target.

A Reuters poll conducted earlier this month found that most economists expected the Fed to keep its policy rate at 3.50%-3.75% through the end of the year. That cautious outlook reflects a weakening labour market and softer consumer data, but inflation remains a constraint on any aggressive easing cycle.

For bond investors, the result is an uncomfortable combination. The economy is strong enough to prevent rapid rate cuts, and inflation is high enough to complicate a sustained decline in yields. That leaves the market vulnerable to sharp moves whenever economic data or official comments change expectations.

The consequences extend far beyond government finance. The 10-year Treasury yield is a key benchmark for mortgages, corporate bonds and a wide range of financial assets. When it rises, companies face higher refinancing costs and consumers typically encounter more expensive loans. Businesses with large capital requirements, including technology companies building data centres for artificial intelligence, are particularly exposed.

The housing market is already feeling the pressure. Mortgage rates have remained around 6.6%, according to recent market data, limiting affordability even as the Federal Reserve’s policy rate is well below its peak from the previous tightening cycle.

Higher Treasury yields can also alter equity valuations. The return available from government bonds provides investors with an alternative to riskier assets, while higher discount rates reduce the present value of future corporate earnings. That is particularly relevant for growth and technology stocks, whose valuations depend heavily on profits expected years into the future.

There is also an international dimension. US Treasuries sit at the center of the global financial system, so higher yields can draw capital towards dollar assets while tightening financial conditions elsewhere. Governments and companies in emerging markets that borrow in dollars can face higher refinancing costs, while foreign central banks must weigh the impact of changing US yields on their currencies and bond markets.

Developments overseas are also reinforcing the recent rise in yields. Global bond markets have been under pressure as investors reassess inflation, government borrowing, and the relative attractiveness of sovereign debt. Rising yields in Japan and Europe have reduced some of the traditional advantage enjoyed by US government bonds.

Geopolitical risks are another factor. Higher oil prices linked to the conflict involving Iran have revived concerns about inflation. A renewed inflation shock would make it harder for the Federal Reserve to lower rates and could push investors to demand still higher yields on long-term Treasuries.

Markets are now watching Fed Chair Kevin Warsh for clearer guidance on the direction of monetary policy, particularly at the Jackson Hole symposium. Any indication that the central bank is prepared to tolerate higher inflation could put further upward pressure on long-term yields.

For the Treasury, the challenge is therefore larger than managing day-to-day volatility. Buybacks can improve market liquidity and influence the composition of outstanding debt, but they cannot eliminate the underlying supply of government borrowing.

Until investors become more confident that inflation is contained and Washington can stabilise its fiscal trajectory, attempts to push borrowing costs lower may continue to provide only temporary relief. The bond market is effectively demanding a more durable answer.

On Tuesday (August 18), the yield on the 30-year Treasury briefly climbed to its highest level since 2007, while recent auctions have also shown investors demanding significantly higher returns.

At a recent auction, the 10-year Treasury note was sold at a high yield of 4.683%, the highest in 19 years, while a 30-year bond auction cleared at 5.216%, a 25-year high.

The rise in yields means the government must pay more to refinance maturing debt and fund new deficits, creating a feedback loop in which higher interest costs can themselves contribute to larger borrowing requirements.

The CBO expects the federal budget deficit to reach USD 1.9 trillion in fiscal 2026, equivalent to 5.8% of gross domestic product. It projects the deficit will widen to USD 3.1 trillion, or 6.7% of GDP, by 2036.

Rising net interest costs account for much of the deterioration, with interest payments projected to increase from about USD 1 trillion this year to USD 2.1 trillion by 2036.

The scale of the interest burden is already becoming visible in government finances.

The implications extend beyond government accounts. Treasury securities form the benchmark for borrowing across the US economy, so sustained increases in government yields can feed into mortgage rates, corporate borrowing costs, and other forms of credit.

Yet the recent rise in yields does not indicate that investors are abandoning US debt. Treasury auctions continue to attract solid demand, including from foreign central banks, institutional investors, and asset managers.

The more immediate concern is the scale and persistence of borrowing. CBO projections show debt held by the public rising from 101% of GDP in 2026 to 120% by 2036, surpassing the previous post-war record. Gross federal debt is projected to reach USD 64 trillion by 2036 under the agency’s baseline assumptions.

The approach of USD 40 trillion also brings the next debt-ceiling confrontation closer. Congress set the statutory borrowing limit at USD 41.1 trillion in 2025, but analysts now expect Treasury to approach that threshold as early as the beginning of next year. That could force lawmakers to raise or suspend the ceiling again to prevent a disruption in government payments.

For markets, the central question is no longer simply whether Washington can continue borrowing. It is how much investors will demand to finance it. With deficits remaining large and interest costs rising, the journey beyond USD 40 trillion is likely to keep fiscal sustainability and Treasury yields firmly in the spotlight.

“Against this backdrop, the 2026 outlook for sectors of the Singapore economy that are linked to the AI-driven technology cycle has improved, although that for sectors directly affected by supply disruptions arising from the Middle East conflict remains weak,” the ministry said.

Economists have also raised their forecasts. Maybank lifted its 2026 growth projection to 5.2% from 4.8%, while UOB raised its estimate to 5% from 4.8%. RHB maintained its 4.5% forecast but warned that Singapore remained vulnerable to a slowdown in AI investment.

The government said the economic impact of the Middle East conflict had also been less severe than initially feared, as countries drew on oil inventories and switched to alternative energy sources, limiting the rise in energy prices.

However, higher fuel and commodity costs remain a risk, while US tariffs could weigh on exports. Singapore currently does not expect a significant impact from a 12.5% US tariff affecting about a third of its exports to America.

The Monetary Authority of Singapore also faces a delicate balancing act. Core inflation rose to 1.6% in June, while headline inflation reached 1.9%. Higher energy and input costs could put further pressure on prices.

Last month, it tightened its monetary policy, citing persistent inflationary risks like the Iran war and the elevated energy prices. The government has already announced an SUSD 900 million support package to help households and businesses cope with high energy prices, on top of the almost SUSD 1 billion announced in April.

Despite the upbeat outlook, MTI warned that geopolitical tensions, US trade policy, and a sudden reversal in AI investment remain risks. Chemicals, petrochemicals, and some consumer-facing sectors may remain under pressure.

However, Beh Swan Gin, Singapore’s Permanent Secretary for Trade, differed with the MTI, as he said that the city-state’s administration does not anticipate an impact from the 12.5% American tariff on Singapore exports.

“With the fog of war lifting and oil prices well below their highs, the economy looks set to keep sailing in the second half,” Maybank economist Chua Hak Bin said.

Chua said the AI boom, safe-haven capital inflows, and a construction upsurge could carry the strong first-half momentum into the rest of the year, adding that growth could again exceed the government’s upgraded forecast.

In a separate statement, Enterprise Singapore upgraded its forecast for growth this year in non-oil domestic exports to 14% to 16%, from 3% to 5% previously.

“The global economy has remained more resilient than expected, bolstered by the sustained AI-related demand and capex spending,” ⁠the government department remarked.

For now, however, Singapore’s position in the global AI supply chain is giving the trade-dependent economy a powerful new growth engine.