Yields later pulled back, but Monday’s milestone capped off a surge of more than 100 basis points since just before the Iran war began in late February, when the 10-year rate was below 4%.

Meanwhile, the war is now in its seventh month, and with little evidence of diplomatic progress toward fully reopening the Strait of Hormuz, crude and refined fuel products remain pricey.

In some ways, energy markets are in even worse shape than during the height of the Iran war. While the U.S. military is guiding significant volumes of oil through the Strait of Hormuz, tanker traffic is well below prewar levels. That means U.S. oil reserves, which are already at the lowest in over 40 years, must keep getting drained.

At the same time, Iran-backed Houthi rebels have seized control of the Bab al-Mandab Strait that has served as a vital bypass for Saudi oil to get around the Strait of Hormuz. And a drone attack has shut down Saudi Arabia’s East-West Pipeline, which diverted much of the kingdom’s oil from the Persian Gulf to the Red Sea.

Brent crude oil prices jumped as high as 4% on Monday to nearly $110 a barrel, the highest since May. The prospect of energy costs staying elevated indefinitely is also pushing inflation expectations up.

As a result, bond yields across Europe and Asia jumped, joining U.S. Treasuries. The run-up comes just as the Federal Reserve is widely expected to hike rates on Wednesday with other central banks likely to follow.

“After several years in which inflation has run above target, it has become harder for policymakers to ‘look through’ the otherwise temporary effects of higher inflation caused by supply shocks,” Neil Shearing, group chief economist at Capital Economics, said in a note on Monday.

“More importantly, in a world of high public debt and large fiscal deficits, there is a potential feedback loop through the bond market that could make a difficult situation considerably worse.”

U.S. inflation has exceeded the Fed’s 2% target for more than five years, and policymakers are less willing to wait and see if prices will eventually cool. Some on Wall Street see a total of three rate hikes from the Fed.

Eventually, higher interest rates will feed into higher bond yields. The new borrowing rates will make it more expensive for governments to maintain enormous deficits and debt.

“Those concerns can push bond yields higher still, creating a self-reinforcing cycle in which rising yields feed fiscal worries, which in turn drive yields higher,” Shearing explained.

For now, the U.S. is not yet in a self-fulfilling fiscal crisis because nominal GDP growth is still outpacing the cost of servicing debt, he added.

And while the oil shock may prove to be manageable, it’s a reminder that a world laden with debt is more vulnerable to supply shocks that can intensify via the bond market, Shearing warned.

“In fact, there is a good case to be made that the key risk from a global macro perspective is less the initial shock than the feedback loop it could set in motion,” he wrote.

The 5% threshold for 10-year Treasury yields could also bring down tech stocks, which sold off on Monday, led by chipmakers that had been riding the massive wave of hyperscaler spending.

In a Financial Times op-ed last week, Rockefeller International Chairman Ruchir Sharma warned the AI bubble could pop when the 10-year yield “decisively breaches” 5%, which has been the upper end of its range since the dotcom era.

Borrowing costs that high would hit the AI boom in different ways. For one, hyperscalers will likely issue fewer bonds to finance their spending. They will also have more trouble issuing new equity as yields above 5% have historically been a headwind for stocks.

In addition, yields topping 5% would start to approach nominal GDP growth, making the national debt even more unsustainable, he pointed out. 

While others on Wall Street have said yields are merely normalizing after years of being suppressed by central bank policies, Sharma noted the U.S. is much more addicted to debt today as the burden has exceeded 100% of GDP.

“As a result, debt-servicing costs are much higher now,” he wrote. “Rising public borrowing costs will squeeze other borrowers sooner, and hit the bubbly AI markets harder.”