A global bond sell-off intensified on Thursday, leading major nations' borrowing costs to their highest levels of the year. This was spurred by oil prices surging towards $100 a barrel, which rekindled concerns about inflation. The 10-year German yield increased by up to 0.03 percentage points, reaching 3.21%, its highest since 2011. US Treasury yields neared their Iran war peak at 4.68% in early trading, while the 10-year French bond yield hit 4% for the first time since 2009, and the UK gilt yield climbed to 5.08%.
The escalation of strikes between the US and Iran has diminished investor hopes for the full reopening of the Strait of Hormuz. Additionally, Iran-backed Houthi militants announced a blockade of Saudi Arabia, contributing to crude oil reaching a seven-week high. Mike Bell, head of market strategy at RBC Blue Bay Asset Management, cautioned against ignoring geopolitical risks. Jon Hill, head of US inflation strategy at Barclays stated that rising inflation expectations suggest the Federal Reserve might struggle to address the issue effectively.
Oil prices hit $100 for the first time since May, with Brent crude rising over 6% following increased US military strikes. Prices spiked after Houthi militia attacked oil tankers in the Red Sea, threatening a critical export route in the Strait of Hormuz. Jonathan Raymond, investment manager at Quilter Cheviot, noted that more expensive fuel and energy will likely increase costs across the economy, creating further challenges for central banks battling inflation. If energy prices remain high, policymakers may face pressure to maintain or even raise interest rates, impacting mortgage holders and borrowers.
The European Central Bank is expected to keep rates steady, but traders are anticipating two more quarter-point increases by next April. Kevin Warsh, the new chair of the US Federal Reserve, assured Congress of the central bank's commitment to "restoring price stability" in the wake of Middle East events, despite pressure from US President Donald Trump for rate cuts. The Fed held US interest rates between 3.5% and 3.75% at Warsh's initial meeting. Goldman Sachs predicts Brent crude could rally above $120 a barrel by the fourth quarter if supply disruptions persist.
