Bond selloff deepens as rising energy prices stoke inflation fears

Global bond yields surged to record highs on Tuesday as tensions in the Middle East drove oil prices above $90 per barrel and unsettled stock markets worldwide. Japan's 10-year benchmark interest rate reached 3 percent for the first time in over a decade, while the U.S. 10-year Treasury yield breached its highest level since early 2023 at 4.78 percent. Futures for French and German debt extended losses, contributing to the downward pressure on bond prices.

Ryutaro Kimura, a senior strategist at BNP Asset Management, noted a growing resignation among investors regarding the surge in interest rates, which has been a consistent foundation for global markets. The rising oil prices and heightened U.S.-Iran tensions have heightened concerns about inflation, which adversely affects bonds. Simultaneously, the escalating sovereign borrowing has investors demanding higher premiums for lending.

U.S. and European equity futures declined after Wall Street experienced modest losses on Monday, and investors appeared anxious ahead of U.S. jobs data on Friday, which could trigger an interest rate-hiking cycle as early as this month. The combination of hawkish monetary policy, geopolitical risks, inflation, and fiscal concerns is intensifying upward pressure on global term premiums and long-end yields.

Brent crude futures climbed above $91 per barrel in Asia trade, while Europe's gas price reached a three-and-a-half-year high in the previous trading session. Conflict in the Middle East has left the energy and inflation outlook uncertain, with traders anticipating short-term rate hikes. The U.S. President has hinted at further strikes against Iran following recent exchanges of fire, and ongoing hostilities between Russia and Ukraine have pushed wheat prices close to a three-year peak.

Markets are pricing an interest rate increase in New Zealand on Wednesday and an increase in Europe the following week. Such hikes in the U.S. and Japan have better-than-even odds. Despite the global rise in borrowing costs, it has provided limited support to the U.S. dollar. The euro remained stable at $1.1619, and the yen strengthened to 159.76 per dollar. Preliminary inflation figures are expected in Europe later on Tuesday.