Key facts
- Asian stocks weakened as oil prices jumped and US Treasury yields surged.
- Brent crude futures rose above $106 a barrel amid uncertainty over the Strait of Hormuz.
- The 30-year US Treasury yield reached 5.5185%, near its highest level since 2004.
- Two-year Treasury yields have risen 55 basis points this month.
- The Reserve Bank of Australia is expected to raise its policy rate on Tuesday.
- Markets are pricing a roughly 66% probability of another Federal Reserve rate increase in October.
Asian stock markets declined as rising oil prices and surging US Treasury yields revived inflation concerns. Brent crude futures climbed above $106 a barrel amid doubts about a US-Iran truce and potential disruptions to energy flows through the Strait of Hormuz, a critical route for global oil shipments. The 30-year US Treasury yield rose to 5.5185%, nearing a level not seen since 2004, while two-year yields increased by 55 basis points as traders bet on further Federal Reserve tightening.
US President Donald Trump rejected an Iranian proposal related to reopening the Strait of Hormuz, with talks expected to continue this week. This uncertainty has kept a geopolitical premium in oil prices and complicated the inflation outlook. A shortage of refining capacity has further pressured diesel prices to record levels, increasing the possibility of higher energy costs feeding into broader inflation.
The prospect of sustained inflation is significant for central banks. The Reserve Bank of Australia is anticipated to raise its policy rate at its upcoming meeting, and markets are pricing a 66% chance of another Federal Reserve rate hike in October. This rise in yields is occurring despite continued strength in the US economy, with the Atlanta Fed's GDPNow model tracking about 5% annualized growth for the quarter.
Strong economic data has supported corporate earnings expectations, limiting the impact of higher borrowing costs on equities. However, the higher-yield environment poses challenges for companies reliant on debt financing, particularly technology firms funding AI infrastructure. Higher Treasury yields also increase the discount rate for future earnings, potentially pressuring growth stocks. Rate strategists suggest the bond selloff may persist until financial conditions show sufficient restriction.