Global bonds fell, pushing yields to multi-decade highs, as concerns about accelerating inflation boosted bets that the Federal Reserve will raise interest rates this month. Oil rose amid escalating geopolitical tensions.
The yield on the 10-year US Treasury note rose three basis points to 4.78%, its highest level since January 2025. The yield on the 10-year Japanese bond climbed five basis points to 2.99%, its highest level in three decades, while its Australian counterpart reached its highest level since 2011.
Bond yields jumped as traders increased the probability of a Federal Reserve interest rate hike in September to 74%, according to data compiled by Bloomberg based on swap contracts. Markets had priced in just 34% the day before Fed Chair Kevin Warsh spoke about curbing inflation at Jackson Hole on Friday.
Brent crude also rose 0.7% to around $91.10 a barrel amid renewed fighting in the Middle East. The United States and Iran exchanged strikes for the first time in nearly a month, with US forces striking an island in the Strait of Hormuz and Tehran retaliating with attacks on the UAE and Jordan.
Stocks resist pressure from oil and yields
While bond yields and oil prices rose, the spillover effect to the broader stock market was limited. The MSCI Asia Pacific Index edged up 0.1%, led by Taiwanese stocks. MediaTek Inc. shares jumped 9.9% in Taipei trading after Nvidia announced a $3.5 billion investment in the chipmaker.
Investors are demanding higher returns for holding bonds after years of massive government spending, persistent inflation, and a surge in corporate borrowing to finance the expansion of artificial intelligence. Warsh's hawkish stance on price pressures has further highlighted this week's US jobs report, given its potential impact on interest rate expectations.
Idana Abio, portfolio manager and senior research analyst at First Eagle Investments, said in an interview with Bloomberg Television that investors have begun to reassess the level at which neutral interest rates appear, and there has been a gradual rise in them.
She added: There is a clear imbalance between supply and demand in the fixed-income market. There is an oversupply from the US corporate sector, and expectations of much larger increases are linked to the giant companies.
Global pressures are pushing bond yields to high levels.
Mark Cranfield, Markets Life strategist at Bloomberg, said that fixed-income traders in the G10 are paying more attention to Japanese government bonds, while Australian bonds are increasingly taking direction from Japanese debt as much as from US Treasury bonds.
He added that the short-term backdrop is toxic, with stubborn inflation coinciding with large fiscal deficits in the United States, Japan, the United Kingdom and France.
Shares in Shein Global Holdings Ltd fell as much as 10% in Hong Kong after it raised HK$13.6 billion ($1.7 billion) in an initial public offering.
Traders are also closely monitoring the yen, which has been trading near 160 yen to the dollar, increasing the risk of renewed market intervention by authorities to slow its decline. The yen has given up more than half of the gains it made during a record-breaking intervention that began in late July.
Piscent pushes Japan towards further interest rate hikes
In a separate development, U.S. Treasury Secretary Scott Bisent told Japanese Finance Minister Satsuki Katayama and Bank of Japan Governor Kazuo Ueda that further interest rate hikes were needed, according to Japan's public broadcaster NHK, citing an interview with a U.S. official.
Bonds remained in the spotlight. Since 2006, yields on longer-term US Treasury bonds have not stayed at such high levels for so long, with expectations that a huge budget deficit, another wave of corporate issuances, and a potentially crucial Federal Reserve meeting will keep investors on edge in the coming weeks.
The yield on 30-year Treasury bonds reached 5.34% in mid-August, its highest level since 2007 and just 10 basis points away from a 22-year high. As of Monday, the yield had closed above 5% for 55 days since the beginning of January, the most closes above that level in any year since 2006, according to data compiled by Bloomberg. The yield stood at 5.27% on Tuesday.
Chris Larkin of Morgan Stanley's eTrade said: With traders keeping an eye on geopolitical volatility, as well as potential seasonal fluctuations, it will be interesting to see what market drivers from last week might carry over into this week.
He added: Stronger-than-expected labor market data may be interpreted as bad news for the market, as it may reinforce expectations of an interest rate hike.
