Escalating tensions tied to the Iran conflict have pushed crude prices toward the $90 to $97 per barrel range, and investors are now betting that the Fed may need to raise interest rates at its upcoming policy meeting.

Treasury yields surge as rate cut dreams evaporate

The bond market is already pricing in the pain. US 2-year Treasury yields climbed to 4.37% on July 23, their highest level since early 2025. The 10-year benchmark wasn’t far behind, reaching a year-to-date high of approximately 4.7%.

The 2-year yield is particularly telling because it tends to track near-term Fed policy expectations. Market-implied odds for a Fed rate hike have increased significantly in the wake of the oil shock. This represents a complete reversal from the consensus view that had prevailed for months, where multiple rate cuts were expected before year-end.

The Fed’s preferred inflation gauge, the PCE index, was already projected to rise to 2.7% back in March when a prior oil surge hit markets. With crude now flirting with triple digits, those projections could look optimistic.

The crypto connection: why Bitcoin should be watching crude oil

Higher interest rates mean tighter financial conditions, which mean less capital flowing into risk assets. Back in March 2026, when oil prices staged a similar surge, Bitcoin traded between $64,000 and $71,000 amid significant volatility.

When the Fed raises rates, holding cash or bonds becomes more attractive because you’re earning more yield. Non-yielding assets like Bitcoin and gold face an uphill battle competing for capital when a 2-year Treasury is paying 4.37% risk-free.

Geopolitics meets monetary policy

The Iran conflict represents exactly the kind of exogenous shock that central banks hate. It’s not demand-driven inflation that the Fed can address cleanly through rate policy. It’s supply-side, meaning the economy gets hit with higher costs without any corresponding increase in economic activity.

The Fed’s track record with supply-side inflation isn’t exactly confidence-inspiring. The 2021-2023 cycle showed how quickly “transitory” can become “persistent” when policymakers misjudge the stickiness of price pressures.

What this means for investors

If oil continues climbing toward or past $100 per barrel, expect Treasury yields to push higher and rate hike probabilities to increase further. The March episode showed that Bitcoin can drop meaningfully when energy-driven inflation fears take hold.