Global yields spike as oil hits four-month high
The 10-year US Treasury yield rose to 4.97%, its highest level in three years, on Friday. Brent crude oil reached a four-month high of $109.97 per barrel. Investors are pricing in a higher probability of central bank rate hikes. Global equity markets fell as borrowing costs increased.
Global bond yields climbed to multi-year highs on Friday. This move followed a sharp increase in oil prices. Brent crude rose to a four-month peak of $109.97 per barrel. The weekly gain for the benchmark stood at nearly 13%. Investors responded by pricing in more aggressive policy tightening from central banks worldwide.
Geopolitical tensions in the Middle East drove the energy spike. The US and Iran exchanged attacks, restricting flows through the Strait of Hormuz. Houthi forces seized control of Yemen's port of Mocha. This action threatens Saudi oil exports in the Red Sea. Analysts at RBC Capital Markets warned that Brent could reach $121.99 if a full-scale war resumes.
US Treasury Yields Hit Three-Year Highs
The 10-year US Treasury yield reached 4.9708%. This is the highest level in three years. It sits just below the critical 5% threshold. The 30-year yield hit a 19-year high of 5.3803%. These increases raise borrowing costs for the $40 trillion US government debt. Mortgage rates also rose, pressuring the housing market.
Two-year yields climbed two basis points to 4.5835%. Markets now assign a 70% probability to a Federal Reserve rate hike this month. A Treasury buy-back program also disappointed investors. It fell short of the expected $6 billion value. This shortfall contributed to the sell-off in US debt.
Asian Bonds Join Global Sell-Off
Australian three-year government bond yields surged 18 basis points. They reached a 15-year high of 5.047%. Japan's 10-year yields rose six basis points to 2.97%. Wholesale inflation in Japan remained elevated. This data supports the case for an imminent rate hike by the Bank of Japan.
JPMorgan analysts expect eight of nine developed-market central banks to hike rates by year-end. This includes the Fed, the Bank of Japan, and four European central banks. The European Central Bank raised rates for the second time this year. Officials indicate further tightening is possible in October.
Equities Fall and Dollar Strengthens
Higher discount rates reduced corporate valuations. Asian shares dropped significantly. The MSCI Asia-Pacific ex-Japan index lost 1.8%. Japan's Nikkei index fell 2.8%. Chinese blue-chips declined 1.2%, and the Hang Seng index dropped 1.5%. US futures showed mixed results, with Nasdaq down 0.2%.
The US dollar strengthened against major peers. It gained 0.4% overnight and closed steady at 99.04. Gold rose 0.3% to $4,328 per ounce. The metal failed to attract significant safe-haven demand. GN markets/rates (en-US) reports that August US consumer price data remains critical. A higher-than-expected print could solidify the case for a Fed hike next week.
