Oil retreat fails to halt bond yield rise in Japan, US

Asian stocks rose for the first time in three days as technology shares led the gains. Bonds remained a focus as market participants looked ahead to a key US inflation reading. The MSCI Asia Pacific Index increased by 0.6%, with Japanese and South Korean stocks gaining ground. This coincided with a rise in a crucial gauge of US semiconductor shares, while President Donald Trump voiced opposition to regulations on artificial intelligence.

Oil prices climbed 0.6% to $103.25 a barrel, after previously falling 2.6% in the prior session. The increase occurred as Saudi Arabia reportedly restored about half the capacity of its East-West pipeline following drone attacks. The US administration also ordered another release from emergency reserves, amid ongoing US-Iran talks that had reached an impasse.

Bonds captured attention after yields on the longest-dated Treasuries hit their highest level since 2002. New Zealand government bonds surged following mixed performance of Treasuries on Tuesday. The 2-year US yield fell by five basis points, while the 30-year yield surpassed 5.61%.

Uncertainty persists in markets due to oil prices and tensions between the US and Iran. Market participants await clearer indications of progress in negotiations. Global bond yields have surged to multi-year highs, as rising energy costs fuel persistent inflation and heighten expectations for further Federal Reserve interest-rate hikes.

Portfolio manager Arjun Vij of JPMorgan Asset Management suggested the decline in bond prices could stabilize if the US-Iran conflict ends quickly, stock prices drop due to a slowdown in economic data, or lower earnings and guidance are reported. Meanwhile, US interest rate strategy head Michael Cloherty noted that long-term yields appear relatively affordable compared to historical levels, and investors have yet to see significant buying interest in this area.

China introduced mortgage subsidies and adjustments to bank lending policies, demonstrating an attempt to bolster an economy showing signs of deceleration. New York Fed President John Williams mentioned the possibility of another interest rate hike later this year to curb inflation, although he emphasized there was no urgency in acting immediately following the central bank's previous rate increase.

Fed Governor Michael Barr reiterated the need for additional rate hikes to tame inflation, while Chicago Fed President Austan Goolsbee advocated for the central bank's response to supply shocks. US consumer confidence in September plummeted to the lowest level since 2014, as sentiments towards the economy and labor market worsened. Job openings declined in August, indicating employers were becoming more cautious about expanding their workforce towards the end of the summer, while layoffs remained limited.

The Middle East conflict and its implications for future inflation continue to shape the primary macro narrative and are likely to determine the trajectory of US rates in the foreseeable future, according to Ian Lyngen at BMO Capital Markets.