Crude oil prices jumped more than two per cent on Monday and have spiked around 10 per cent this week after the United States struck an Iranian island in the Strait of Hormuz, triggering a series of tit-for-tat attacks in which Tehran has targeted American interests across several regional countries.
Stock markets fell while bond yields held at multi-decade highs as investors increased bets on further interest rate hikes.The latest military escalation follows weeks of relative calm during which peace talks made no progress, with Washington stating it would pursue the “economic asphyxiation” of the Islamic republic.
With the Strait of Hormuz — through which about a fifth of the world’s oil and gas passes — effectively closed for the foreseeable future, energy costs are unlikely to fall, fuelling growing inflation fears.
Combined with concerns over government spending and a surge in corporate debt sales, this has pushed rate hike expectations sharply higher, adding pressure to government borrowing costs.
The yield on 30-year UK government bonds has climbed to its highest level since 1998, while 10-year UK debt yields have reached levels last seen during the 2007–08 global financial crisis. Japan’s 10-year bond yield is at a 30-year high, US 30-year Treasury yields are nearing their 2007 peak, and the US 10-year yield has also returned to financial-crisis-era levels.
Rajeev De Mello of Gama Asset Management said bond yields were already rising, and the renewed US-Iran attacks and their impact on oil prices have made investors more concerned about bonds. He added that at current levels, higher yields pose a clear headwind to Asian equities, particularly longer-duration tech stocks.
Markets across Asia declined, with technology firms — reliant on low borrowing costs to fund investment — dragging down Tokyo and Seoul. Hong Kong, Shanghai, Sydney, Singapore, Wellington, Taipei and Manila also closed lower, following losses across all three major Wall Street indexes.
Investors are now awaiting key jobs and inflation data over the coming week, which could determine whether the Federal Reserve raises rates at its meeting in two weeks. Traders are pricing in a 70 per cent probability of a hike, according to Bloomberg.
Fed Governor Michael Barr reinforced those expectations, saying policymakers should be ready to raise rates if inflation remains stubbornly above the bank’s two per cent target — a mark it has exceeded for more than five years. He said that if incoming data show inflation moderating toward that target, the Fed could afford to take more time assessing its policy stance, but that persistent inflation would call for decisive rate action.
