US Treasury yields rose on Tuesday, September 1, with the benchmark 10-year yield touching its highest level since January 2025 as renewed tensions in West Asia pushed global borrowing costs higher. According to CNBC TV18, the 10-year Treasury yield rose 3 basis points to 4.79%, while the 30-year yield climbed more than 2 basis points to 5.27%. Government bonds in Japan, Australia and New Zealand declined as renewed geopolitical tensions drove oil prices higher, fueling inflation concerns and expectations for further monetary tightening. The yield on the 10-year Japanese government bond rose to 2.965% after touching a three-decade high in the previous session. Money markets have increased bets on a September interest-rate hike after Federal Reserve Chair Kevin Warsh underscored his commitment to bring down inflation at Jackson Hole last week, putting increased focus on this week's employment report. Chris Larkin at E*Trade from Morgan Stanley noted that with traders tracking geopolitical volatility as well as potential seasonal volatility, it will be interesting to see which market impulse from last week might carry over to this week.
The Indian rupee faces mounting pressure this week as markets reassess the prospect of a Federal Reserve rate hike as soon as next month. According to The Hindu BusinessLine, US Fed Chair Kevin Warsh said on Friday that the central bank may need to raise rates if inflation remains above target, prompting investors to lift the odds of a hike at the September 15-16 policy meeting. His comments have raised the stakes for incoming data ahead of the September meeting, with this week's calendar offering plenty for markets to assess, starting with the ISM manufacturing survey and followed by the ADP employment report and ISM services survey, before Friday's August jobs report. Markets are now assigning a 60% probability to a September move, up from 35% before the commentary, as reported by The Hindu BusinessLine. According to CME FedWatch, the probability of a 25-basis-point Fed rate increase later this month has risen to 66%, from roughly 41% a week earlier, following Warsh's Jackson Hole remarks about potential rate increases if inflation fails to move back toward its 2% target. Federal Reserve Governor Michael Barr said Tuesday he would be prepared to support an interest rate hike if inflation doesn't ease, speaking at a banking forum in Washington. Barr expressed concern about "broader price pressures taking hold" as inflation has remained stuck above the Fed's 2% target for nearly 5½ years, stating he's "concerned about the trends in the data" and would "act decisively to raise rates" if inflation appears not to be moderating sufficiently.
Brent crude extended gains in early Asian trading to over $92 a barrel after renewed fighting in the Middle East. According to CNBC TV18, US forces earlier launched fresh strikes against Iran, while a tanker was struck by unknown projectiles off the coast of Oman in the Strait of Hormuz. The escalation pushed crude prices higher, with West Texas Intermediate futures rising more than 1% to above $87 a barrel and Brent crude gaining more than 1% to above $92. With no clear path to reopening the Strait after months of war, concerns over inflation have remained elevated. The seven-month conflict has kept oil prices high, raising inflation concerns and expectations of tighter monetary policy. The benchmark Brent crude held near $92 a barrel, adding pressure on major oil importers such as India. A Bloomberg gauge of the dollar fell for a second consecutive day Tuesday, while gold recouped some of its losses from the past two days, trading around $4,460 an ounce.
Indian government bonds experienced a sharp decline, pushing yields higher as U.S. Treasury yields jumped after fresh military escalation between Iran and the United States. According to The Economic Times, the benchmark 6.94% 2036 bond yield settled at 6.9581% after a volatile session, compared to 6.9452% on Monday, after rising to 6.9653%, its highest intraday level since June 11. "Rising U.S. Treasury yields and the escalation in geopolitical risk have dealt a fresh blow to Indian bonds. With the benchmark yield approaching 7.00%, market appears vulnerable to further selling pressure unless global rates retrace meaningfully," a trader with a primary dealership said. The seven-month conflict has kept oil prices high, raising inflation concerns and expectations of tighter monetary policy. The one-year swap and the two-year swap were not yet traded, while the five-year rate was 3 basis points higher at 6.5050%. India's economy expanded 7.8% year-on-year in April-June, above the 7.1% Reuters poll forecast, strengthening the case for tightening.
Higher US Treasury yields can make dollar-denominated assets more attractive relative to emerging-market assets such as Indian equities and bonds, encouraging foreign investors to shift capital towards US Treasuries. According to CNBC TV18, this can put pressure on the Indian rupee and potentially increase volatility in Indian markets. A weaker rupee can make imports such as crude oil more expensive, adding to domestic inflationary pressures. Higher US yields can also put upward pressure on Indian bond yields, potentially raising borrowing costs and limiting the Reserve Bank of India's flexibility on interest rates. Foreign investors turned marginal sellers of Indian bonds last month, posting their first monthly outflow of the financial year, offloading ₹8.5 billion ($89.54 million) of securities under the Fully Accessible Route in August. Despite the foreign outflows, ample banking system liquidity supported bond demand, with the surplus swelling to ₹6.65 trillion on Monday, its highest since April 2022. Japan's 30-year high bond yields, hawkish US Federal Reserve policies, and rising crude oil prices are straining global liquidity, exerting pressure on Indian equities.
