Global bond yields reached multi-year highs as oil prices surged, increasing inflation concerns and prompting investors to increase bets on further interest rate hikes by central banks worldwide. According to Reuters, Brent crude rose to a four-month high of $109.97 a barrel, following a 6% jump overnight and putting it on course for a weekly gain of nearly 13%. The worsening disruption to key shipping routes has increased market fears that the conflict could become prolonged, with oil flows remaining constrained through the Strait of Hormuz amid attacks between the United States and Iran, while Iran-aligned Houthis took control of Yemen's port of Mocha, raising concerns over Saudi oil exports through the Red Sea. Eurozone government bonds are facing their sharpest weekly selloff since the Iran war began, with German, French and Italian yields climbing as surging energy prices fuel inflation concerns and boost expectations of further rate hikes. Eurozone government bond prices fell on Friday, putting global debt markets on track for their sharpest weekly selloff since the start of the Iran war, as reported by The Economic Times.
US Treasury yields climbed to multi-year highs as a sharp rise in oil prices pushed investors to reassess how quickly the Federal Reserve may need to tighten monetary policy. According to Reuters, the 10-year Treasury yield rose 2 basis points to 4.9708%, its highest level in three years and just below the closely watched 5% threshold, while the 30-year Treasury yield rose to 5.3803%, its highest level in 19 years. The selloff came as benchmark oil prices jumped more than 5% to their highest level since May, reviving concerns that higher energy costs could feed through into broader inflation. The U.S. 10-year Treasury yield was also approaching 5%, a level last reached in October 2023 and previously seen in 2007, as reported by The Economic Times. Traders are pricing in a 72% chance of a Fed hike next week, up from 49% a week earlier, according to the CME FedWatch tool, as the August inflation data has shifted investor expectations. The 2-year note yield hit its highest level since July 2024 at 4.596% after jumping 12 basis points in the previous session, with the 2-year yield typically moving in step with interest rate expectations for the Federal Reserve.
The European Central Bank raised interest rates by 25 basis points on Thursday, in line with expectations, while lifting its inflation forecast and lowering its growth outlook. The move underscored growing concerns that higher energy costs could keep price pressures elevated for longer. Sources familiar with the ECB's discussions now see further monetary tightening as increasingly likely, potentially as soon as the central bank's October 29 meeting, according to Reuters. Money markets are pricing in three additional ECB rate increases by March, with the possibility of a fourth hike by June, with the central bank indicating that further tightening could remain on the table. Germany's bund futures slipped 0.22% near their lowest since 2011, while French OAT futures fell 0.3% to a record low, as reported by Business Standard. French 10-year yields have been among the biggest movers, increasing by about 25 basis points over the week, putting global debt markets under pressure. French 10-year yields have risen about 24 basis points this week, their biggest weekly increase since mid-May.
Asian bond markets extended the global selloff as borrowing costs from Tokyo to Sydney reached multi-decade highs. Australia's three-year government bond yields surged 18 basis points to a 15-year high of 5.047%, according to Business Standard. Japan's 10-year government bond yields rose 6 basis points to 2.97%, with the Bank of Japan widely expected to raise rates to a 31-year high next week and possibly signal faster tightening in the future. Japanese wholesale inflation remained elevated, strengthening expectations that the Bank of Japan could raise interest rates soon. Government borrowing across developed markets has also become a persistent source of concern, with investors demanding greater compensation to hold sovereign debt, as noted by Business Standard. Sovereign yields serve as a reference point for asset prices across financial markets, and this higher price of money means steeper mortgage rates for consumers and tougher spending choices for governments as debt costs climb.
The combination of elevated oil prices, rising bond yields and expectations of tighter monetary policy has increased the risk of further volatility across global financial markets. Economists are forecasting a 0.2% monthly increase in core consumer prices, although stronger-than-expected inflation remains a risk after producer price data released overnight showed continued price pressures. Higher bond yields also increased discount rates used to value equities, weighing on stock markets across Asia. Eurozone government bond prices fell on Friday, putting global debt markets on track for their sharpest weekly selloff since the start of the Iran war, as reported by The Economic Times. Yields across government debt markets in the Group of Seven economies have posted their biggest weekly increases since the early stages of the war in late February, with two-year yields across G7 economies increasing by nearly 25 basis points on average this week, while 10-year yields have risen almost 20 basis points. A sustained break for 10-year Treasuries above 5% is seen by some analysts as a critical line that could make bonds more competitive with stocks, potentially pulling dollars out of equity markets.
