Good morning. After the U.S. and Iran began trading blows again on Sunday, higher oil prices sparked a rise in U.S. government bond yields. But American debt and the uncertainty of what is still to come create a complicated mix. Today, we explain what investors need to know.

Trade: U.S. ​Treasury ​Secretary Scott ‌Bessent said that he plans to meet with his Canadian counterpart at a gathering of G20 finance ministers this week.

Departure: Frustrated by the pace of procurement project approval, Doug Guzman is expected to leave the Defence Investment Agency after one year in charge, sources say.

Additions: Ottawa revamped the leadership of Invest in Canada, appointing private equity executive Gurinder Grewal as CEO and former diplomat Dominic Barton as board chair.

Oil: Venezuela’s development deal with the U.S. ups the urgency of Canada’s effort to expand and diversify its energy exports.

The 10-year yield has jumped to around 4.76 per cent, its highest level since January, 2025, and the 30-year at 5.25 per cent is little changed since before the U.S. Treasury deployed a water pistol to bring long yields back in line. Short-term yields are up, too.

What’s going on? What do these numbers all mean, and what messages are they sending?

The rudiments

Let’s start with the basics. These yields reflect what investors are asking to be paid for the privilege of lending to the government for a given length of time. They can be plotted out to create a graphical depiction over time which is known as the yield curve.

At the shorter end of the curve, the two-year yield is usually watched as an indication of where the market thinks short-term interest rates will be set.

Federal Reserve Chair Kevin Warsh clarified the central bank’s intentions around its inflation target on Friday. Warsh “delivered a clear warning that unless inflation makes progress towards the 2-per-cent target ‘with speed’, the Fed could be pushed to tighten policy,” Scotiabank FX strategists Shaun Osborne and Eric Theoret said in a note to clients yesterday.

The reactions

The two-year U.S. government bond yield, which stood around 4.23 per cent before Warsh’s speech, jumped to 4.36 per cent afterwards and has remained elevated. More people have started pricing in expectations that the Fed will raise rates.

Moving along the curve, investors typically demand to paid more for lending for longer – known as the “term premium” – so most of the time the yield curve slopes upward, from left to right.

Investors start asking for more compensation for risks like longer-term inflation that could eat away at their returns over time. In the case of the U.S., investors are also growing increasingly leery of the cost of servicing a US$40-trillion pile of debt.

Lorne Gavsie, head of macro and foreign exchange at CI Global Asset Management, said in the absence of action that addresses investors’ fiscal concerns more directly, yields could continue to “grind higher.”

“When the level of debt continues to grow and budget deficits continue to be problematic, the interest component of the annual U.S. budget is creeping up to a very, very critical level,” he said.

“If you’re not addressing the fiscal budget, if you’re not finding ways to reduce the debt, and you’re simply saying the long-term strategy is simply to increase growth, thereby increasing tax revenues, which will ultimately allow us to pay this down over time, the bond market’s not necessarily going to take your word for it.”

The (possible) results

Higher yields are not just an indicator of market concern: They also mean that issuers need to pay more to issue new debt – whether they’re a government or an AI hyperscaler.

Add into the mix the complication of higher oil prices. These could boost inflation, raising the chances the Fed lifts interest rates to rein it in. And aggressive tightening would come with its own risks.

Scotiabank strategist Hugo Ste-Marie said in a note to clients: “We still believe equities can withstand a couple of rate hikes. However, if rising oil prices rekindle inflation pressures, and markets begin pricing 75 or 100 bps of tightening, the risk of a Fed policy mistake would start to rise more materially.”

Regardless, Gavsie noted the latest moves should be taken with a grain of salt because the market is in a seasonal lull with lower participation, lower volumes and less willingness by traders to put on new positions.

“I wouldn’t necessarily jump to too strong of a conclusion one way or the other, given that we’re in a summer market,” he said.