Renewed U.S.-Iran military strikes, following a month-long lull, have intensified, leading to a significant increase in oil prices and bond yields. Brent crude futures jumped to nearly $96 a barrel, and U.S. WTI futures reached levels not seen since July, contributing to inflation fears. The U.S. Central Command confirmed strikes on Iranian targets in retaliation for attempted attacks on shipping in the Strait of Hormuz and U.S. military bases.
The escalation has prompted a sell-off in global bonds, pushing borrowing costs to multi-decade highs. The U.S. 10-year Treasury yield climbed to 4.81%, its highest since late 2023, while the short-term 2-year yield rose to 4.41%. Japanese government bond yields hit 3% for the first time since 1996, and U.K. 30-year yields reached their highest since 1998. Rising energy prices and increased government debt loads are cited as key factors.
Central banks are under pressure to address persistent inflation, which remains above targets. Federal Reserve Governor Michael Barr indicated support for a rate hike if inflation doesn't moderate, echoing Fed Chair Kevin Warsh's hawkish stance on tackling inflation, which stood at 3.4% in July. Markets are now pricing in a greater than 50% chance of a rate hike by major central banks, including the Federal Reserve and the European Central Bank, with the CME Group's FedWatch tool indicating strong odds for a quarter-point hike this month.
