Global bond yields surge as oil spike fuels inflation fears

Global bond yields surged to multi-year highs while share markets tumbled on Friday as a sharp rise in oil prices intensified inflation concerns and prompted investors to increase bets on further interest rate hikes by central banks, Reuters reported.

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%. Oil flows remained 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.

Read more: Global Market Today: Asian stocks, bonds fall on oil, inflation concern


Reuters reported that the worsening disruption to key shipping routes has increased market fears that the conflict could become prolonged, with the risks to oil supplies adding to inflation pressures worldwide.

U.S. Treasury yields climbed sharply as investors reassessed the outlook for monetary policy. The benchmark 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.

Read more: US stocks today: US stocks end lower as rising oil, Treasury yields lift Fed hike bets

The 30-year Treasury yield rose to 5.3803%, its highest level in 19 years. Higher long-term borrowing costs are likely to put further pressure on U.S. mortgage rates and the housing market, while increasing financing costs for the U.S. government's roughly $40 trillion debt.

The two-year Treasury yield also rose 2 basis points to 4.5835%, after jumping 12 basis points overnight. Markets were pricing in roughly a 70% probability of a Federal Reserve rate hike this month as policymakers face renewed inflation risks from higher energy prices.

The selloff in Treasuries was also partly linked to a U.S. Treasury buyback programme that fell short of the anticipated $6 billion value, Reuters reported.

Global rate-hike bets increase

The bond market selloff spread across Asia. Australia's three-year government bond yield surged 18 basis points to a 15-year high of 5.047%, while Japan's 10-year government bond yield rose 6 basis points to 2.97%.

Japanese wholesale inflation remained elevated, strengthening expectations that the Bank of Japan could raise interest rates soon.

Analysts at JPMorgan now expect eight of the nine developed-market central banks to raise interest rates by the end of the year, including the Federal Reserve, Bank of Japan, the four major European central banks and the central banks of Australia and New Zealand.

The European Central Bank raised interest rates for the second time this year and policymakers indicated that further tightening could remain on the table, with an October move being considered.

Oil and inflation in focus

The surge in crude prices has increased the importance of U.S. consumer price data for August, due later on Friday. The figures could influence expectations for the Federal Reserve's next policy decision.

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.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.8%, while Japan's Nikkei dropped 2.8%. China's blue-chip CSI300 index declined 1.2% and Hong Kong's Hang Seng Index fell 1.5%.

U.S. stock futures were also under pressure, with Nasdaq futures down 0.2% and S&P 500 futures little changed.

The U.S. dollar strengthened alongside Treasury yields after rising 0.4% against major currencies overnight. It was last steady at 99.04.

Gold, meanwhile, edged 0.3% higher to $4,328 an ounce after falling nearly 2% in the previous session, with the precious metal failing to attract stronger safe-haven demand despite the broader market selloff.

Reuters reported that 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.