Global bonds fall as surging oil prices inflame inflation risks
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By Stella Qiu
SYDNEY, Sept 11 : Global bond yields spiked to new highs and sharemarkets slumped on Friday as soaring oil prices inflamed inflation risks, sending investors scrambling to price in more policy tightening from central banks across the globe.
Oil prices jumped 6 per cent overnight, with Brent crude futures hitting a four-month high of $109.97 a barrel on Friday. Oil flows remained restricted through the Strait of Hormuz as the U.S. and Iran traded attacks, while Iran-aligned Houthis seized control of Yemen's port of Mocha, threatening Saudi oil exports in the Red Sea.
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"Fighting between Houthi and Saudi-backed forces has surged in the past week, marking the most significant violence in Yemen in years, with maritime traffic through the Bab el-Mandeb gravely imperiled by the Houthi advances," said analysts at RBC Capital Markets, tipping Brent could hit $121.99 a barrel in the fourth quarter.
That was a wake-up call for markets that are finally starting to price in the risk of a protracted war. Comments from President Donald Trump that the war could last beyond the November midterm elections haven't helped, with bond yields surging globally on heightened inflation fears.
The benchmark 10-year Treasury yields jumped overnight to close in on the critical 5 per cent level, the 30-year hit the highest since 2007 and two-years surged 12 basis points overnight as markets ramped up bets that the U.S. Federal Reserve will have to raise interest rates this month to tame inflation, currently priced at 68 per cent probability.
Asian bonds fell steeply on Friday, with Australia's three-year government bond yields surging 17 basis points to a 15-year high of 5.037 per cent. Japan's 10-year government bond yields rose 5.5 basis points to 2.965 per cent.
"We expect eight of the nine DM central banks to hike rates between now and year-end. This includes the Fed, BoJ, all four European central banks we cover, Australia, and New Zealand," said analysts at JPMorgan in a note.
"Canada is expected to remain the lonesome dove. The tightening is for now expected to remain shallow, but risks to our forecasts lean in the direction of more action in the face of resilient growth, sticky core inflation, and commodity price pressures."
The surge in oil prices has raised the stakes for U.S. consumer prices data for August due later in the day, which may make or break the case of a Fed rate hike next week.
Forecasts are centred on a 0.2 per cent monthly rise in the core measure of CPI, although risks are skewed towards a higher number as the PPI data overnight showed some stickiness.
Higher bond yields raised the discount rates used for corporate valuations, leaving Asian stocks in the red. Australia's resources-heavy slid 1 per cent, Japan's Nikkei tumbled 2.8 per cent and South Korea's KOSPI dived 2.7 per cent.
Nasdaq futures fell 0.2 per cent and S&P 500 futures were little changed.
The U.S. dollar lifted with higher Treasury yields, having gained 0.4 per cent overnight against its major peers. It was steady on Friday at 99.06.
In commodity markets, gold held at $4,317 an ounce after dropping nearly 2 per cent overnight, failing to catch some of the safe-haven bids.
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