Key facts
- Global bond yields reached new highs due to rising oil prices and US-Iran tensions.
- Oil prices surged above $90 a barrel following military actions between the U.S. and Iran.
- The 10-year U.S. Treasury yield climbed to a near 20-month high of 4.78%.
- Stock markets experienced pressure globally.
- Markets are pricing in potential rate hikes from the Federal Reserve, European Central Bank, and Reserve Bank of New Zealand.
Global bond yields climbed to major new highs as rising oil prices, driven by US-Iran military clashes, exacerbated inflation concerns and put pressure on stock markets. The 10-year U.S. Treasury yield, a benchmark for asset prices, rose to a near 20-month top of 4.78%, while Japan's 10-year benchmark yield approached 3%, a level not seen for a generation.
Higher oil prices and increased US-Iran tension are fueling worries about inflation, which is detrimental to bonds. Federal Reserve Chair Kevin Warsh's recent remarks signaled that policymakers might act if price pressures do not ease. This challenging macro environment, characterized by hawkish monetary policy, geopolitical and inflation risks, and rising fiscal concerns, is expected to maintain upward pressure on global term premiums and long-end yields.
Markets are pricing in interest rate hikes in New Zealand this week and in Europe next week, with better-than-even odds for increases in the U.S. and Japan this month. Brent crude futures topped $91 a barrel, and Europe's benchmark gas price closed at a more than 3-1/2-year high on Monday.
Geopolitical events are creating an uncomfortable backdrop, with U.S. President Donald Trump threatening further strikes against Iran. Stepped-up fighting between Russia and Ukraine has also pushed wheat prices close to three-year highs. The rise in borrowing costs has been global, offering limited support to the U.S. dollar, with the euro steady at $1.1619 and the yen at 159.76 to the dollar.