By COMFORT OGBONNA
Global bond yields climbed sharply on Tuesday, with several major government debt markets reaching multi-decade highs as rising oil prices and renewed uncertainty over the Middle East conflict intensified concerns about inflation and government borrowing costs.
The surge in bond yields came as oil prices rose for a third consecutive session and Asian stocks came under pressure after a temporary U.S.-Iran ceasefire expired, while Iran warned that it could adopt a more aggressive military posture.
The yield on the benchmark U.S. 30-year Treasury bond rose as much as 1.6 basis points to 5.326%, its highest level in nearly two decades. The 10-year Treasury yield also increased, rising 1.8 basis points to 4.7399%.
Higher long-term yields can have broad consequences for financial markets because they increase the return investors demand for holding government debt while also raising borrowing costs for companies, households and governments.
The increase has become particularly important for stock markets, where higher bond yields can make equities less attractive by raising the rate used to value future corporate earnings.
If the rise in yields continues, companies with heavy debt loads could face greater financial pressure as refinancing becomes more expensive. Governments could also see their interest expenses increase, particularly in countries already carrying large fiscal deficits.
Asian markets showed signs of that pressure on Tuesday. Futures linked to major U.S. stock indexes declined, while an index tracking Asia-Pacific shares outside Japan fell 0.8%.
South Korea’s benchmark stock index erased an early gain of more than 3% and fell 2.1% after markets reopened following a holiday. Japanese shares also declined, with the Nikkei 225 losing 2.2%.
Stocks in Taiwan and China added to the broader weakness, reversing earlier gains as investors assessed the potential impact of higher oil prices, rising borrowing costs and renewed geopolitical uncertainty.
The pressure on bond markets was not limited to the United States. Japan’s 10-year government bond yield rose 1.5 basis points to 2.935%, its highest level in three decades.
The move reflects a broader reassessment among investors about the risks associated with holding long-term government debt. Large fiscal deficits, increasing government bond issuance and heavy investment in artificial intelligence infrastructure are competing for capital, potentially forcing borrowers to offer higher yields to attract investors.
The recent bond selloff appears to have been driven more by investors demanding higher compensation to hold long-term debt than by a sudden rush to sell government securities.
At the center of the latest market moves is the renewed uncertainty surrounding the Middle East conflict. The expiration of the temporary U.S.-Iran ceasefire has raised concerns that hostilities could intensify, potentially affecting oil production and transportation through critical shipping routes.
Iran’s warning that it could adopt a fully offensive military posture has further increased uncertainty over the duration and economic consequences of the conflict.
Brent crude futures rose 0.4% to $91.26 a barrel on Tuesday, extending a three-day rally. Higher energy prices have increased fears that inflation could remain elevated if disruptions to oil supplies persist.
That presents a difficult challenge for central banks. Weak economic data might normally encourage policymakers to consider lower interest rates, but a sustained increase in energy prices could keep inflation above target and limit their ability to ease monetary policy.
U.S. economic data have recently shown signs of slowing. An unexpected decline in retail sales and other weaker indicators have encouraged investors to reduce expectations of an imminent Federal Reserve interest rate increase.
The combination of slower economic activity and higher long-term bond yields has created an unusual market environment. Investors are weighing the possibility of weaker growth against the risk that inflation could remain stubbornly high because of rising energy costs.
U.S. stocks also reflected the uncertainty during Monday’s trading session. The S&P 500 fell 0.5%, while the Nasdaq Composite declined 0.3%.
The technology-heavy Nasdaq has been particularly sensitive to higher bond yields because many technology companies derive a significant portion of their valuations from expected earnings far into the future. Higher interest rates reduce the present value of those future earnings.
The rising yields have also raised questions about whether the U.S. administration will respond to increased financial pressure by seeking to reduce geopolitical tensions.
Historically, sharp increases in Treasury yields have sometimes been followed by efforts to calm markets through policy signals or comments aimed at reducing uncertainty. Investors, however, have seen fewer indications of an imminent resolution to the conflict this time.
The absence of a clear diplomatic breakthrough has left markets facing the possibility of continued fighting and prolonged disruption to global energy supplies.
The U.S. dollar benefited modestly from the renewed geopolitical uncertainty. The dollar index rose 0.1% to 99.65 after recently falling to a two-month low.
The currency’s movement reflected some demand for traditional safe-haven assets as investors became more cautious about the outlook for global growth and financial markets.
Gold, another traditional haven, moved in the opposite direction. Gold prices fell 0.6% to $4,389.44 an ounce, ending a two-day advance as some investors took profits following recent gains.
Cryptocurrency markets also weakened. Bitcoin fell 0.3% to about $64,150, while ether declined 0.6% to roughly $1,893.
The simultaneous rise in bond yields, oil prices and geopolitical risk highlights the increasingly complicated environment facing global investors. Markets are attempting to balance slower economic growth and expectations for easier monetary policy against the possibility of another inflationary shock caused by energy disruptions.
The direction of oil prices will remain crucial. If crude continues to rise because of prolonged disruptions in the Middle East, inflation expectations could increase further and put additional upward pressure on long-term bond yields.
Conversely, a credible ceasefire or diplomatic agreement could reduce the geopolitical premium in oil prices and ease some of the pressure on bonds and equities.
For now, however, investors remain cautious as the conflict enters another uncertain phase. With U.S. and Japanese government bond yields already at historically elevated levels and stock markets showing signs of strain, further increases in energy prices could intensify pressure across global financial markets.
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