Updated in New York morning time

By Karen Brettell

NEW YORK, July 23 (Reuters) - Benchmark 10-year Treasury yields climbed to their highest levels since January 2025 on Thursday, as oil prices surged, stoking fears of renewed inflation and U.S. Federal Reserve interest rate hikes.

Oil prices hit their highest levels in more than a month and surpassed $90 a barrel for the first time since June 11 after Yemen's Houthis said they struck two Saudi oil tankers, widening disruption to global oil shipping through both the Red Sea and the Strait of Hormuz.

The renewed spike in oil prices has intensified concerns that the Fed will need to raise rates to head off mounting inflation pressures.

“The move in rates reflects really two things. One is worries about inflation and a potentially more aggressively hawkish Fed, and two is expectations that growth is still quite solid,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.

Goldberg added that uncertainty over Fed policy, driven by new Fed Chair Kevin Warsh's preference against offering forward guidance, is compounding the market's move.

TRADERS SEE 38% CHANCE OF HIKE

Fed funds futures traders are pricing in a 38% chance the Fed will hike rates at its two-day meeting ending on July 29.

At current pricing levels, a decision to leave rates unchanged would mark the second-largest gap between market expectations and Fed policy in the past decade, according to TD Securities. Should the Fed opt to hike, it would represent the largest such mispricing in that span.

Market positioning is likely amplifying the move, with traders who had been holding unprofitable long positions now unwinding their debt holdings.

The 2-year note US2YT=RR yield, which typically moves in step with Fed interest rate expectations, rose 6.41 basis points to 4.366%, the highest since February 2025.

The yield on benchmark U.S. 10-year notes US10YT=RR rose 5.25 bps to 4.71%, from 4.657% late on Wednesday.

The yield curve between 2- and 10-year yields US2US10=TWEB flattened to 34.3 bps.

The 30-year bond US30YT=RR yield rose 3.57 bps to 5.1827%, the highest since May 20.

The 30-year yields have traded above 5% for 14 consecutive days, the longest stretch since 2007, reflecting concerns about the longer-term U.S. fiscal outlook.

Thirty-year real yields, which strip out expected inflation, have risen to 2.987%, the highest level since 2008. US30YTIP=RR

Attention is turning to the Treasury Department's next quarterly funding announcement on August 5, amid concerns officials may signal a need to increase auction sizes. Traders are watching whether the government will drop language indicating it plans to hold auction sizes steady for "at least the next several quarters."

Demand for inflation-linked debt will be tested later on Thursday when the Treasury sells $21 billion in 10-year Treasury Inflation-Protected Securities. The government saw soft demand for a $13 billion sale of 20-year bonds on Wednesday.