Global bonds buckle as surging oil prices inflame inflation risks

Global bond yields surged to record levels and stock markets plummeted on Friday due to the surge in oil prices, which are inflaming inflation risks and prompting central banks worldwide to tighten policy. Brent crude oil reached a four-month high of $109.97 a barrel, following a 6% overnight increase and a weekly gain of nearly 13%.

The conflict between the US and Iran, along with the Houthi takeover of Yemen's Mocha port, has restricted oil flows through the Strait of Hormuz and the Bab el-Mandeb, potentially driving Brent to $121.99 by year-end. President Donald Trump's comments on the war's duration have added to market concerns, prompting bond yields to rise globally.

The 10-year Treasury yield hit a three-year high of 4.9708%, nearing the 5% threshold, which increases the cost of the U.S. government debt worth $40 trillion. The 30-year yield hit a 19-year high of 5.3803%, lifting U.S. mortgage rates and impacting the housing market. Asian stocks suffered due to Brent's staying above $100 and yields nearing a 2023 peak.

Two-year yields climbed another 2 basis points to 4.5835%, as investors bet on a Fed rate hike this month to curb inflation, which is at about a 70% probability. The U.S. bond market decline was partly due to a Treasury buyback program falling short of the expected $6 billion value. Asian bonds followed the global selloff, 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% due to elevated wholesale inflation, raising the possibility of a Bank of Japan rate hike. Analysts now anticipate eight of nine developed-market central banks to hike rates by the end of the year, including the Fed, BOJ, European Central Bank, and reserve banks of Australia and New Zealand.

The European Central Bank raised rates for the second time this year, with some officials planning more tightening, potentially in October. The oil price surge has intensified the stakes for U.S. consumer price data for August, which could determine the Fed's rate hike decision. Higher bond yields elevate the discount rates used for corporate valuations, leading to deep losses in Asian stocks, including a 1.8% drop in MSCI’s Asia-Pacific index outside Japan and a 2.8% decline in Japan's Nikkei.

Chinese blue-chips fell 1.2%, and Hong Kong's Hang Seng dropped 1.5%. The U.S. dollar gained 0.4% overnight, holding steady at 99.04 against its major peers. In commodities, gold rose 0.3% to $4,328 an ounce, failing to benefit from safe-haven demand.