Global bonds fall as surging oil prices inflame inflation risks

Global bond yields reached record highs and stock markets plummeted on Friday due to skyrocketing oil prices intensifying inflation concerns, prompting investors to anticipate tighter monetary policy from central banks worldwide. Oil prices surged by 6 percent, with Brent crude futures reaching a four-month high of $109.97 a barrel on Friday.

The Strait of Hormuz remained a bottleneck as the U.S. and Iran engaged in hostilities, while Iran-backed Houthis seized Yemen's port of Mocha, endangering Saudi oil exports through the Red Sea. Analysts at RBC Capital Markets warned that Brent crude could climb to $121.99 a barrel by the end of the year, signaling a potential shift in market sentiment toward heightened inflation risks.

The conflict between Houthi and Saudi-backed forces escalated in recent weeks, marking the most intense violence in Yemen in years, which could further disrupt maritime traffic through the Bab el-Mandeb. President Donald Trump's remarks on the war possibly extending beyond the November midterm elections added to market unease, contributing to a surge in global bond yields.

Key 10-year Treasury yields edged closer to the 5 percent threshold, while the 30-year bond hit its highest level since 2007, and the 12-basis-point rise in two-year yields heightened expectations of imminent interest rate hikes by the U.S. Federal Reserve. Asian bonds experienced a steep decline, with Australia's three-year government bond yields surging 17 basis points to a 15-year high of 5.037 percent, and Japan's 10-year government bond yields rising 5.5 basis points to 2.965 percent.

JPMorgan analysts projected that eight of the nine developed market central banks would raise rates between now and year-end, including the Fed, Bank of Japan, European Central Bank, Australia, and New Zealand. Although the tightening is expected to be gradual, analysts anticipate further action in response to robust growth, persistent core inflation, and commodity price pressures.

The oil price surge also heightens the importance of U.S. consumer price data for August, which could determine whether a Fed rate hike occurs next week. Forecasts centered on a 0.2 percent monthly increase in the core CPI, though there was a greater likelihood of a higher figure as initial producer price data indicated some inflationary stickiness.

Higher bond yields increased the discount rates applied to corporate valuations, resulting in losses for resource-heavy Asian stocks, with Australia down 1 percent, Japan's Nikkei falling 2.8 percent, and South Korea's KOSPI slipping 2.7 percent. Nasdaq futures declined 0.2 percent, while S&P 500 futures remained flat. The U.S. dollar strengthened, gaining 0.4 percent against major currencies on higher Treasury yields, remaining steady at 99.06.

In commodity markets, gold steadied at $4,317 an ounce after falling nearly 2 percent the previous day, failing to capitalize on safe-haven demand.