Global bonds fall as surging oil prices inflame inflation risks

Global bond yields surged to record highs and stock markets plummeted on September 11 as the cost of oil skyrocketed, triggering heightened concerns over inflation. Oil prices surged 6 percent, with Brent crude futures reaching a four-month high of US$109.97 a barrel on the same day. The conflict between Iran and the US, coupled with the control of Yemen's Mocha port by Iran-aligned Houthis, further exacerbated the situation.

Analysts from RBC Capital Markets warned that the escalating violence in Yemen could drive Brent crude prices as high as US$121.99 by the fourth quarter.

The mounting tensions in the region and the prospect of a prolonged conflict prompted investors to factor in a higher likelihood of central banks tightening monetary policy globally. The 10-year Treasury yields closed in on the 5 percent level, while the 30-year hit its highest level since 2007. Two-year yields surged by 12 basis points as markets anticipated that the US Federal Reserve might raise interest rates in September to curb inflation, which currently stood at a 68 percent probability.

Asian bond markets suffered steep declines on September 11, with Australia's three-year government bond yields surging 17 basis points to a 15-year high of 5.037 percent. Japan's 10-year government bond yields rose 5.5 basis points to 2.965 percent. JPMorgan analysts forecast that eight out of nine developed market central banks would raise interest rates between now and the end of the year, including the US Federal Reserve, Bank of Japan, European Central Bank, Australian, and New Zealand central banks.

Canada was expected to remain the only holdout, but analysts remained cautious, anticipating further tightening if economic growth continues to outpace inflation and commodity prices remain elevated.

The surge in oil prices intensified the focus on the upcoming US consumer price data for August, which could determine whether the Federal Reserve would hike interest rates the following week. Forecasts centered on a 0.2 percent monthly increase in the core Consumer Price Index, although there was a growing risk of a higher figure given the recent persistent price pressures in the Producer Price Index.

As bond yields rose, corporate valuations were negatively impacted due to higher discount rates. Australia's resources-heavy stocks dropped 1 percent, while Japan's Nikkei fell 2.8 percent and South Korea's KOSPI declined 2.7 percent. Nasdaq futures slipped 0.2 percent, and S&P 500 futures remained relatively unchanged. The US dollar strengthened as Treasury yields rose, gaining 0.4 percent against its major counterparts, closing at 99.06 on September 11.

Gold prices, however, remained relatively stable at US$4,317 an ounce, failing to attract strong safe-haven demand.