Renewed military conflict between the United States and Iran in the Strait of Hormuz has triggered a global bond selloff, pushing yields to multi-decade highs and exacerbating inflation fears. The US 10-year Treasury yield surged to 4.80%, its highest since January 2025 according to some sources, and 4.8122% according to others, a near three-year high. The two-year yield sensitive to monetary policy jumped to 4.3890%, while the 30-year yield, a reference for US mortgage rates, climbed to 5.286%, nearing its 2007 peak. This surge in yields, meaning lower bond prices, dragged down major US stock indexes, with the Dow Jones Industrial Average falling 0.79%, the S&P 500 down 0.71%, and the Nasdaq Composite off 1.03%. Even the Philadelphia Semiconductor Index, a bellwether for the Korean market, fell 2.14%.
The Middle East tensions, specifically US airstrikes on an Iranian island in the Strait of Hormuz and subsequent retaliatory actions, have caused oil prices to spike. Brent crude for November delivery settled at $94.65 a barrel, up 4.60% from the previous session, reaching its highest since July 24. West Texas Intermediate (WTI) for October delivery closed at $90.22 a barrel, up 5.20%, the highest since July 23. This jump in oil prices, and the effective closure of the Strait of Hormuz which handles about a fifth of global oil and gas, has reignited inflation concerns that had only just begun to fade.
The inflation scare and the ongoing bond selloff have significantly increased expectations for a Federal Reserve rate hike. According to CME Group's FedWatch tool, markets are now leaning towards a 25-basis-point hike this month, with an implied 67% probability, up from 39.6% a week ago. Fed Governor Michael Barr echoed recent sentiments from Fed Chair Kevin Warsh, stating he would support a rate hike "if inflation appears not to be moderating sufficiently." The benchmark rate is already at 3.50%-3.75%. Analysts like Rajeev De Mello at Gama Asset Management note that higher yields act as a "headwind to Asian equities, especially longer duration tech stocks."
The bond selloff is not limited to the US. In Japan's government bond market, the 10-year yield rose as high as 3% intraday, its highest in 30 years, since October 1996, driven by concerns over large government spending plans and expectations of further rate increases by the Bank of Japan. In Britain, the 30-year gilt yield rose to 5.919%, the highest since 1998, and the 10-year yield reached 5.224%, its highest since 2008. Germany's 10-year yield climbed to 3.339%, its highest since 2011. This global bond market weakness is also attributed to the sheer volume of corporate debt issued, particularly by big tech firms for AI investments, with the five largest hyperscalers selling $159 billion in corporate bonds in the first half of this year alone.
