Emerging market assets, which had recently experienced a four-day winning streak, saw their rally stall on Tuesday. This reversal was primarily attributed to a significant surge in long-term US Treasury yields and an escalation of tensions in the Middle East. The confluence of these factors diminished demand for riskier assets, pushing borrowing costs higher globally.
The global bond sell-off deepened, with yields reaching new highs as rising energy prices fueled inflation concerns and investors braced for a series of interest rate hikes. The 10-year US Treasury yield surpassed its 4.75% resistance level to reach 4.78%, marking its highest point since early 2025. Japan's 10-year benchmark hit 3% for the first time in a generation, while French and German debt futures extended losses, driving yields to 15-year highs. Australia's 10-year yield also experienced its sharpest rise in five months.
Analysts are noting a shift in sentiment regarding interest rates. Ryutaro Kimura, a senior strategist at BNP Asset Management, described a "sense of resignation" among investors concerning rising Japanese borrowing costs. Andrew Lilley, chief rates strategist at Barrenjoey, indicated that much of the bond sell-off was a reassessment of Federal Reserve policy, predicting a Fed rate hike in September as the start of at least a three-rate hike cycle. Markets are currently pricing in interest rate hikes in New Zealand on Wednesday, Europe next week, and better-than-even odds for increases in the US and Japan this month.
Inflation worries are mounting due to higher oil prices and increased US-Iran tensions, which are detrimental to bonds. Brent crude futures exceeded $91 a barrel, and Europe's benchmark gas price ended the summer at a 3.5-year high, with stockpiles at record seasonal lows. These inflationary pressures, combined with soaring sovereign borrowing, are leading investors to demand higher premiums for lending. The rise in borrowing costs has been a global phenomenon, offering only limited support to the US dollar, with the euro steady at $1.1619 and the yen at 159.76 to the dollar.
