Bond selloff pressures stocks as oil crosses US$91 a barrel

Global bond yields reached fresh heights on Tuesday as renewed Middle East fighting pushed oil prices above US$90 per barrel, causing stress for worldwide stock markets. The 10-year US Treasury yield, a key indicator for asset prices, surged 2.2 basis points to a near 20-month high of 4.78%. Japan's 10-year benchmark approached 3%, a level unseen in a generation.

US futures stabilized after modest declines in Wall Street indexes, but investors remained cautious ahead of US jobs data on Friday, which could trigger an interest rate hiking cycle as early as this month.

Higher oil prices and escalating US-Iran tensions heighten concerns over inflation, which poses a risk to bonds, just as Federal Reserve Chair Kevin Warsh hinted at potential policy shifts if inflation pressures persist. In his recent speech, Warsh indicated policymakers might act if price pressures don't ease. Wee Khoon Chong, an APAC Macro Strategist at BNY, noted that macroeconomic factors like hawkish monetary policy, geopolitical risks, and inflation are combining to keep term premiums and long-end yields upwardly pressured.

Japan's Nikkei dipped 0.2% in early trade, while the Hang Seng fell 0.7%. The Shein Global IPO debut, a clothier, set the tone for the markets, with the Chinese fast-fashion retailer experiencing a lackluster initial offering. German and French long bond yields hit their highest levels in 15 years, with German bund futures reaching a new 15-year low in Asian trading. French OAT futures traded at their lowest since 2012.

Brent crude futures surged past US$91 per barrel in early Asian trade, and Europe's benchmark gas price hit a more than 3-1/2-year high on Monday. Expectations for interest rate hikes in New Zealand and Europe this month improved. Geopolitical tensions, including potential further strikes by the US against Iran and ongoing fighting between Russia and Ukraine, contribute to an uneasy atmosphere.

Despite global borrowing costs rising, the US dollar did not gain significant support. The euro held steady at US$1.1619, and the yen was at 159.76 to the dollar.

Hong Kong's Shein shares fell in early trading to just below its offer price, which had been reduced from previous fundraising rounds. The fast-fashion retailer, famous for its inexpensive US$5 tops and US$10 dresses, faced challenges due to US and European tariff changes that undermined its low-cost business model.