US borrowing costs surge to highest level since 2025 amid Middle East tensions and inflation fears

US borrowing costs hit a fresh high on Tuesday as renewed strikes in the Middle East pushed up oil prices and heightened concerns over inflation.

The effective interest rate on borrowing over 10 years rose to 4.79%, its highest level since January 2025, as oil prices surged above $92 a barrel.

Such movements on global bond markets affect rates at which the US government can borrow money at, but also influence rates people pay for mortgages, car loans and credit cards.

The spike in borrowing costs comes and fears over the pace of price rises in the US has led to increased speculation that the Federal Reserve will increase interest rates later this month.

Michael Barr, a governor at the US central bank, said in a speech on Tuesday that inflation had been too high for five years and warned if it did not cool "then I think we should act decisively to raise rates".

His comments came after Kevin Warsh, chairman of the Fed, said last week that policymakers would "have work to do" if they were not confident cost-of-living pressures were easing for Americans.

Latest figures show prices rose 3.4% in the year to July, above the Fed's 2% target, however, interest rates have been left unchanged for months between 3.5% and 3.75%.

Warsh has remained tight-lipped about the potential path of interest rates, but investors have been monitoring comments in recent days and expectations of a rate hike this month have grown.

Inflation is concerning both the Fed and global investors, which is driving the increased rates - or yields as they are known - on bond markets.

Governments sell bonds - essentially an IOU - to raise money for spending, and in return they pay interest.

Bond investors typically demand higher returns - or yields - if inflation is high or they expect it to be elevated in the future, and such rates tend to set the path for borrowing costs in economies around the world.

Besides inflation, investors also have concerns about the amount of borrowing from governments around the world as well spending by Big Tech firms, with uncertainty remaining over the return on investment of artificial intelligence.

In the US, national debt has passed the $40tn mark, doubling in just the space of a decade under both the Donald Trump and Joe Biden administrations.

After borrowing costs over 30 years hit levels not seen since 2007, Treasury Secretary Scott Bessent said the the US government would buy back more debt in a bid to lower rates, but the market's reaction to the announcement proved short lived.

In the US 30-year mortgage rates have risen to a one-year high of almost 6.7% following spikes in bond markets.

Rising rates can make borrowing and spending less attractive, which risks dampening economic growth if consumers cut back and businesses halt investment.