The bond rout is deepening even as oil tankers return to the Strait of Hormuz

Supply chains that transform crude into fuel are still under siege, and that is keeping prices high—helping drive a brutal bond selloff. The return of oil tankers through the Strait of Hormuz was supposed to bring down the price of crude, gasoline and diesel, taming inflation and lowering the world’s borrowing costs. It isn’t happening.Vessels in the Strait of Hormuz this week.Even as U.S. forces have worn down Iran’s grip on the waterway, helping oil shipments rebound toward prewar levels, the global crude-futures benchmark jumped 4.4% Thursday to $102.31 a barrel. Average U.S. gas prices tracked by AAA were hanging above $4.41 a gallon. And the 10-year Treasury yield, a rough proxy for interest rates on many types of loans, this week notched its highest level in 24 years.The factors helping keep bond yields sticky stem from interlocking threats that are still squeezing the oil market like a vise:Estimates for Hormuz traffic vary, and traders fear re-escalation could throttle back supplies at any moment.Houthi rebels are threatening shipping lanes that also carry oil across the Arabian Peninsula.Thousands of miles away, a Ukrainian air campaign is targeting Russian refineries, which have historically been diesel factories feeding many industrial economies.Those colliding factors have pushed up the cost of moving crude and making fuel across the supply chain, raising the price to operate everything from cars and trucks to commercial jets and farming equipment.The bottleneck is sending inflationary aftershocks across America that could extend beyond November’s midterm elections, pressuring the Federal Reserve to consider additional interest-rate hikes in the months ahead.Already, the bond market is struggling to absorb a flood of artificial-intelligence-linked debt, huge fiscal deficits and an economy hot enough to keep inflation above the central bank’s target. While the 10-year Treasury yield Thursday ticked lower to 5.233%, it is fresh off its steepest one-quarter run-up since 1994, helping propel U.S. mortgage rates past 7%.gfx“There is still a high degree of sensitivity in the markets now to whether there’s progress to some kind of formal agreement between the U.S. and Iran, to the potential for further disruption,” said Arend Kapteyn, global head of economics and strategy at UBS Investment Bank.“From a central bank perspective,” he added, “you don’t just care about crude, but you care about the (refined) products, and the products are super tight.”As the U.S. Navy has degraded Iran’s ability to attack tankers or nearby energy facilities, Gulf oil producers and shipping firms have grown more adept at fending off or evading strikes. Morgan Stanley analysts estimate Middle East crude exports have recently been just 7% below prewar levels.But with many tankers turning off tracking systems or transferring cargoes between ships to minimize threats, other analysts are circumspect about just how much shipping has recovered. The flow data “could be a little optimistic, but it’s also not necessarily going to be consistent,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth. “It’s really opaque.”Renewed strikes on regional shipping lanes by Iran or its Houthi proxies in Yemen are also pushing traders to bake in more risk to their positions—buoying prices. On Wednesday, the U.K. Maritime Trade Operations Centre reported three vessels in the Strait of Hormuz were hit with projectiles.Drawdowns in inventories from China to Europe to the U.S., which buffered the market in the conflict’s first seven months, have left little room for error. Those stockpiles will also need to be refilled.A driver refueling his truck near Missoula, Montana, last month.The uncertainty has left traders like Babin glued to headlines about possible fuel-export restrictions by the U.S. and China. Even though crude futures have retreated somewhat from recent highs, the cost of physical oil cargoes remains more elevated, signaling refiners are racing to lock in short-term supplies. North Sea dated crude—a benchmark reported by Argus Media to track on-the-spot deliveries—fetched $127.42 a barrel Thursday.“There’s clearly still this demand for these barrels regardless of what the numbers say is coming through [Hormuz],” Babin said.While tanker traffic has rebounded, J.P. Morgan recently told clients, “The recovery, however, is uneven.” The bank estimates that exports of refined products such as gasoline, diesel and jet fuel from the region still remain around 40% below prewar levels.The cost of bringing crude to market has also skyrocketed. Tankers heading west from the Gulf have at times taken a long trip past the southern tip of Africa to avoid the threat of Houthi attacks. At the same time, many shipping firms are carrying oil out of the Gulf by shuttling supplies just outside Hormuz, where it can be transferred to vessels headed elsewhere.Those factors have tied up much of the global fleet of supertankers and sent freight rates surging. The roughly 21-day trip by skyscraper-sized vessels ferrying crude from the Middle East to China recently cost the equivalent of $35 a barrel, according to Argus, up from less than $7 the day before the war began.Once that crude reaches refiners, costs are snowballing further. Thanks to reduced capacity in the Middle East, as well as Ukrainian strikes on Russian refineries that pushed Moscow to curb diesel exports, traders are paying a premium to companies elsewhere that can pump out fuel.gfxIn New York, diesel futures have recently fetched roughly double the price of crude, with spreads far exceeding any previously recorded levels, boosting wholesale costs for gas stations.Many energy executives expect the dynamic will persist; 48% believe at least a year will pass before the spread between diesel prices and crude costs normalizes to 2025 levels, according to a Dallas Fed survey released this week. Roughly 36% said the same about gasoline.Now, some companies’ plans to hedge against higher costs that they locked in early this year or after the war’s outset are ending, said Charlie Macnamara, head of U.S. Bank’s commodities team. Businesses such as farmers, home-improvement stores and truckers face a tough choice.“Do I lock in now? Or do I wait and hope that things get better?” Macnamara said. Higher prices now “will start to bleed into those hedging plans, and that will ultimately bleed into the end consumers.”President Trump has said he expects Tehran won’t make a deal until after the midterms. Privately, the president also told aides he expects to resume bombing after Americans vote, The Wall Street Journal reported.While energy prices remain painfully high, analysts believe they are not high enough to force a major slowdown in an economy fueled by the AI boom and a record-breaking stock market.“If economic resilience and investment demand remain intact, there may still be scope for yields to move higher,” said Seema Shah, chief global strategist at Principal Asset Management.Write to David Uberti at david.uberti@wsj.comGet the latest World News, breaking headlines and global updates from the US, UK, Pakistan, Bangladesh, Russia and other countries. Follow major international events on Hindustan Times.