Bonds and stocks experienced declines as escalating Middle East tensions, stemming from President Donald Trump's rejection of Iran's latest proposal for reopening the Strait of Hormuz, weighed on market sentiment. This geopolitical development dampened the optimism that had briefly lifted markets late last week. Shorter-maturity Treasuries led the losses, with the rate-sensitive two-year yield climbing five basis points to 4.90%. The benchmark 10-year yield also advanced four basis points, reaching 5.20%, erasing Friday's gains.
Oil emerged as a significant driver, with Brent crude gaining 1.6% to around $106 a barrel after Iran maintained its firm stance on a seven-day proposal for reopening the Strait of Hormuz. The dollar strengthened against most major currencies, while gold dropped 1.8% to about $4,250 an ounce, as elevated energy costs fueled inflation concerns and bolstered expectations for further Federal Reserve interest rate hikes. The average yield on global bonds surpassed 4% for the first time since 2007 last week, raising worries about the impact of higher borrowing costs on the economy and corporate earnings.
Asian stock markets broadly slipped, with MSCI's index of Asian stocks falling 0.5%. Benchmark equity gauges in mainland China and South Korea experienced drops exceeding 2%, while Japan's Nikkei remained relatively flat. Futures for the Nasdaq 100 Index fell 0.6%, and S&P 500 futures declined 0.3%. Analysts, like Naoki Fujiwara of Shinkin Asset Management, cited the Middle East situation and rising bond yields as primary sources of investor anxiety. The market is increasingly pricing in a 66% chance of another Fed rate hike in October, with roughly 90 basis points of tightening anticipated by late next year. Treasury Secretary Scott Bessent, however, urged the Fed to consider productivity gains from AI and deregulation as potential factors to keep inflation in check.
