Global bonds fall as surging oil prices inflame inflation risks

Global bond yields surged to record highs and stock markets fell sharply on Friday, September 11, 2021, as soaring oil prices heightened inflation concerns, forcing investors to factor in more aggressive rate hikes by central banks worldwide. Oil prices surged by 6% overnight, with Brent crude futures reaching a four-month peak of $109.97 a barrel on Friday.

Tensions between the U.S. and Iran, coupled with the Houthi rebels seizing control of Yemen's Mocha port, disrupted oil shipments and added to the inflationary pressures. Analysts at RBC Capital Markets predict Brent crude could reach $121.99 a barrel by the fourth quarter, prompting concerns of protracted conflict. President Donald Trump's comments that the war might persist beyond the November midterm elections further rattled markets, pushing global 10-year Treasury yields close to the 5% threshold.

The 30-year bond hit its highest level since 2007, while two-year yields rose 12 basis points overnight, indicating investors' anticipation of a potential Fed rate increase this month to curb inflation, currently at a 68% probability. Asian bonds experienced a steep decline on Friday, with Australia's three-year government bond yields surging 17 basis points to a 15-year high of 5.037%, and Japan's 10-year government bond yields up 5.5 basis points to 2.965%.

Analysts at JPMorgan anticipate eight out of nine major central banks to raise rates by the end of the year, including the Federal Reserve, Bank of Japan, European Central Bank, and central banks in Australia and New Zealand. The tightening measures are expected to be modest for now, but the surge in commodity prices signals a greater likelihood of additional rate hikes if economic growth remains robust and core inflation remains stubborn.

The surge in oil prices intensified the pressure on U.S. consumer prices, with data set to be released later in the day, potentially determining the Fed's rate hike decision for the upcoming week. Elevated bond yields elevated the discount rates for corporate valuations, driving down Asian stocks, including Australia's resources-heavy sector, which dropped 1%, Japan's Nikkei by 2.8%, and South Korea's KOSPI, which fell 2.7%.

Nasdaq futures declined 0.2%, and S&P 500 futures remained relatively unchanged. The U.S. dollar strengthened as Treasury yields rose, gaining 0.4% against major currencies, remaining steady at 99.06. In commodity markets, gold settled at $4,317 an ounce after a near 2% decline the previous day, failing to attract safe-haven demand.