Bond markets across the world came under renewed pressure on Friday as investors demanded higher returns to lend to governments, with rising oil prices fuelling fears that inflation will remain stubborn and interest rates will stay elevated.
The yield on the benchmark 10-year US Treasury note reached 4.9708% in Asian trading, its highest level in three years and close to the psychologically important 5% threshold. Higher yields push up borrowing costs for households, companies and governments, while also weighing on share prices.
The sell-off spread across the Pacific. Australian government bond yields rose to 15-year highs, New Zealand swap rates jumped by 22 basis points and Japan’s benchmark government yield climbed nine basis points as traders increased bets that central banks may have to tighten policy further.
Brent crude, the international oil benchmark, briefly moved above $108 a barrel on Thursday, having risen by more than 50% since its July low. The surge has added to concerns that an energy shock could feed through into transport, manufacturing and consumer prices.
US shares fell for a fourth consecutive session on Thursday, with the S&P 500 down 0.6%, the Dow Jones Industrial Average losing 316 points and the Nasdaq dropping 0.7%, according to the Associated Press. Brent settled at $107.63 a barrel after touching its highest level since May.
Official figures released by the US Bureau of Labor Statistics showed producer prices rose 0.4% in August, while prices over the 12 months to August were 5.4% higher. Energy costs were a major factor, with final-demand energy prices rising 4.2% and diesel fuel jumping 24.1% during the month.
US inflation data in focus
Markets are now awaiting the US consumer price index for August, due at 8.30am Eastern Time on Friday. Economists are expecting core consumer prices, which exclude food and energy, to rise by 0.2% over the month.
A stronger-than-expected reading could push Treasury yields above 5% and increase pressure on the Federal Reserve to raise interest rates at its meeting next week. Futures markets were pricing in a roughly 70% chance of an increase.
Asian equities were already sharply lower, with Japan’s Nikkei 225 and South Korea’s Kospi each down by more than 2%. European markets were expected to open more steadily after government borrowing costs in the region had already reached multi-decade highs.
The market turbulence has been compounded by concern over the outlook for energy supplies. Disruption around the Strait of Hormuz has kept oil prices elevated, while renewed risks around the Bab al-Mandab Strait could force more shipping to travel through the Suez Canal and around Africa, adding time and cost to Asian deliveries.
Investors will also be watching US consumer sentiment later on Friday, alongside British industrial production and trade figures for July, as policymakers assess how higher borrowing costs and renewed inflationary pressure are affecting the wider economy.
