Global bonds buckle as surging oil prices inflame inflation risks

Global bond yields soared to unprecedented levels and stock markets plummeted on Friday as rising oil prices exacerbated inflation concerns, prompting investors to factor in more tightening from central banks worldwide. Brent crude oil surged to a four-month peak of $109.97 a barrel following a 6% jump the previous night, marking a weekly increase of nearly 13%.

The Strait of Hormuz remained blocked due to ongoing tensions between the U.S. and Iran, while Houthi rebels seized Yemen's Mocha port, threatening Saudi oil exports through the Red Sea. Helima Croft, head of global commodity strategy at RBC Capital Markets, warned that Brent could reach $121.99 a barrel later in the year due to the prospect of a prolonged Saudi-Houthi conflict.

This served as a wake-up call for markets that were finally beginning to acknowledge the risk of protracted war. President Donald Trump's comments that the war could extend beyond the November midterm elections further unsettled investors, contributing to a global surge in bond yields. The benchmark 10-year Treasury yield jumped 2 basis points to 4.9708%, its highest in three years, just below the 5% threshold, increasing borrowing costs for a $40 trillion U.S. government debt.

The 30-year yields hit another 19-year high of 5.3803%, raising U.S. mortgage rates and dampening the housing market. Two-year yields climbed another 2 basis points to 4.5835% after jumping 12 basis points overnight, as markets anticipated the U.S. Federal Reserve would likely raise interest rates this month to combat inflation, which is currently at a 70% probability.

The U.S. bond market decline was partly attributed to a Treasury buyback program that fell short of the expected $6 billion. The selloff extended to Asian bonds, with Australia's three-year government bond yields surging 18 basis points to a 15-year high of 5.047%. Japan's 10-year government bond yields rose 6 basis points to 2.97% as data revealed persistent wholesale inflation, strengthening the case for an imminent rate hike from the Bank of Japan.

Analysts at JPMorgan now anticipate that eight out of nine developed-market central banks, including the Fed, BOJ, European Central Bank, and reserve banks of Australia and New Zealand, will raise interest rates by the end of the year. The tightening, while initially anticipated to be gradual, now seems more likely as growth remains resilient, core inflation remains stubborn, and commodity price pressures persist.

Higher bond yields increased the discount rates used for corporate valuations, negatively impacting Asian stocks. The MSCI's Asia-Pacific index outside Japan dropped 1.8%, Japan's Nikkei fell 2.8%, Chinese blue-chips declined 1.2%, and Hong Kong's Hang Seng lost 1.5%. U.S. stock futures were flat, and the U.S. dollar strengthened, gaining 0.4% against major currencies.

In commodity markets, gold edged up 0.3% to $4,328 an ounce after falling nearly 2% overnight, failing to attract significant safe-haven demand.