Global bond markets are facing increasing pressure due to a surge in oil prices, with Brent crude trading above $106 a barrel and even reaching $108.27 a barrel, leading to a significant sell-off in government bonds. This rise in energy costs is intensifying concerns about inflation and the prospect of further interest rate hikes, prompting investors to re-evaluate risks in both debt and equity markets.
The U.S. 10-year Treasury yield has climbed to 5.2% and even 5.23%, marking its highest level since 2007. Similarly, the UK 10-year gilt yield increased to 5.42%, near its highest since 2008, and Germany's 10-year Bund yield reached 3.65%, the highest since 2011. This global trend in rising borrowing costs is attributed to persistent inflation, strong economic growth, and the Federal Reserve's recent rate hike, with futures markets implying two more quarter-point increases by January.
The renewed selling pressure on bonds is partly driven by President Trump's rejection of Iran’s Strait of Hormuz proposal, which has fueled oil supply fears. Jim Reid, global head of macro research at Deutsche Bank, noted the stalemate in U.S.-Iran talks contributes to rising bond yields and oil prices. Geoffrey Yu, a senior strategist at BNY, commented that these moves reflect a continuation of trends driven by constrained energy supply concerns.
Asian bond markets are also affected, though with some divergence. Japan's two-year government bond yield rose by 0.05 percentage points to 1.98%, following minutes from the Bank of Japan suggesting potential faster rate increases. In contrast, Chinese 10-year government bonds remained flat at 1.67%, with Ecaterina Bigos, senior market strategist at BNP Paribas Asset Management, stating that China's monetary policy is diverging from global trends. However, Asian equity markets saw declines, with the CSI 300 dropping 2.2%.
