Morning Bid: Bond investors in revolt as Iran threatens to go ’fully offensive’

Government borrowing costs have surged to levels not witnessed in decades, as the Middle East conflict intensifies and investors worry about the impact on inflation. On Tuesday, the yield on the 30-year Treasury bond hit its highest point since June 2007, peaking at 5.321% during the day. This spike was triggered by weak economic data, prompting traders to speculate that the Federal Reserve would refrain from raising interest rates to tackle inflation.

The potential for higher energy prices, with Brent crude oil trading at around $91 per barrel for a third consecutive day, compounded the market turmoil when paired with ambiguous signals from the U.S. central bank about its future policy direction. These factors spilled over into global fixed income markets on Tuesday, with the yield on the benchmark 10-year Treasury bond increasing by 0.4 basis points to 4.7259%, while corresponding Japanese government bond yields rose 2.5 basis points to a 30-year high of 2.945%.

Iran's senior official warned that Tehran would adopt a "fully offensive" military stance due to stalled negotiations to permanently end the war with the U.S. In response, Washington refused to extend a temporary ceasefire agreement that had expired the previous day. The diplomatic tensions were further heightened by U.S. President Donald Trump's threat to bomb Oman if it interfered with negotiations regarding the future of the Strait of Hormuz.

Oman, a key ally of the United States, had been targeted by Trump's ire over the week, joining South Korea and Canada on that list. The sell-off in global fixed income markets negatively impacted equities in the Asian trading session, causing MSCI's Asia-Pacific index (excluding Japan) to drop 0.7%, driven by a 1.5% decline in South Korea's KOSPI as the Seoul market returned from a holiday.

The Nikkei 225 index fell 2.1%, while S&P 500 e-mini futures saw a 0.3% decrease. Early European trading saw pan-region futures decline 0.4%, German DAX futures dip 0.5%, and FTSE futures remain unchanged. Key market-moving events scheduled for Tuesday include the release of the UK's unemployment rate, average weekly earnings for June, HMRC payrolls change for July, and labor productivity for Q1, as well as the Euro Zone's ZEW Survey Expectations for August.