Renewed tensions between the US and Iran fueled inflation concerns, sending Brent crude oil prices up to $95, triggering a sharp sell-off in global bond markets, and causing South Korean stocks to fall 4%.

Renewed tensions between the US and Iran fueled inflation concerns, sending Brent crude oil prices up to $95, triggering a sharp sell-off in global bond markets, and causing South Korean stocks to fall 4%.

The global bond market is experiencing its most severe sell-off in decades. With renewed military tensions between the US and Iran, soaring oil prices, and rising inflation concerns and interest rate hike expectations, yields in major markets such as US, Japanese, and Australian bonds have climbed to ten- or even multi-decade highs. Asian stock markets are also under pressure, and market anxieties about the prospects of risky assets have intensified significantly.

The yield on the 10-year U.S. Treasury note rose to 4.81%, a near three-year high, further approaching the 5% level considered a key psychological threshold by the market. Meanwhile, the yield on the 10-year Japanese government bond broke through 3%, the first time since 1996, and the yield on the 10-year Australian bond rose to 5.25%, the highest since 2011. Brent crude oil rose 1% to $95.61 per barrel, diesel prices climbed to their highest level in more than four months, and European natural gas prices also rose to their highest level since 2023.

The sudden cooling of market sentiment directly impacted the stock market. The MSCI Asia Pacific Index fell 2% to its lowest level in nearly a week, the South Korean KOSPI index extended its losses to 4%, SK Hynix and Samsung Electronics both fell by more than 4%, and the Nikkei 225 index also saw its intraday decline widen to 3%. European futures also pointed to further weakness.

"The market weakness this morning was clearly due to the double whammy of renewed concerns about the Strait of Hormuz and rising global bond yields," said Homin Lee, senior macro strategist at Lombard Odier in Singapore. He remains constructive on Asia-Pacific markets, particularly North Asia, arguing that "earnings fundamentals remain solid."

South Korea's KOSPI index fell as much as 4%, with SK Hynix and Samsung Electronics both dropping more than 4%. Nikkei 225's intraday decline widened to 3%.The yield on the 10-year U.S. Treasury note rose to 4.81%, a near three-year high.The yield on Japan's 10-year government bonds broke through 3% for the first time since 1996, while the yield on Australia's 10-year bonds rose to 5.25%, the highest since 2011.German government bond futures fell to their lowest level since 2011, French OAT futures fell to a record low, and UK government bond yields hit their highest level since 2008 on Tuesday.Brent crude rose 1% to $95.61 a barrel, after gaining nearly 6% in the previous session, and is on track for its fourth consecutive day of gains.Diesel prices climbed to their highest level in more than four months, while European natural gas prices also rose to their highest level since 2023.Spot gold fell 0.5% to $4,306.90 an ounce.Bitcoin rose 0.1% to $77,508.32.

Renewed tensions between the US and Iran fuel oil price surge and inflation concerns.

The immediate trigger for this new round of selling was the sudden escalation of tensions in the Middle East. The US military confirmed the completion of a series of strikes against Iran, and Iran subsequently announced a missile attack on a US airbase in Jordan. This exchange of fire broke the relative calm of the previous weeks—after the Trump administration had gradually shifted its policy focus toward Iran from military action to economic pressure.

The energy market reacted swiftly. Brent crude rose 1% to $95.61 a barrel, after gaining nearly 6% in the previous session, and was on track for its fourth consecutive day of gains. Diesel prices climbed to their highest level in more than four months, and European natural gas prices also rose to their highest level since 2023, amid market concerns about the risk of disruption to energy transport through the Strait of Hormuz.

"The market weakness this morning was clearly due to the double whammy of renewed concerns about the Strait of Hormuz and rising global bond yields," said Homin Lee, senior macro strategist at Lombard Odier in Singapore. He remains constructive on Asia-Pacific markets, particularly North Asia, arguing that "earnings fundamentals remain solid."

Expectations of interest rate hikes are rising rapidly, putting pressure on several central banks.

The soaring energy prices, coupled with already high inflationary pressures, have driven markets to significantly raise their expectations for interest rate hikes by major central banks around the world.

Following Federal Reserve Chairman Kevin Warsh's hawkish speech at the Jackson Hole symposium last week, the market's probability of a Fed rate hike in September has risen to approximately 70%. The swap market has almost fully priced in a European Central Bank rate hike on September 10th, a Reserve Bank of Australia rate hike on September 29th with a 65% probability, and the Bank of Japan's September 18th action is already fully priced in. The yield on the 2-year US Treasury note rose in tandem to 4.41%, its highest level since January 2025.

Krishna Guha, Vice Chairman and Head of Central Bank Strategy at Evercore ISI, stated bluntly that the Federal Reserve's primary focus is currently on inflation, with oil prices and bond yields carrying more weight than employment data in its policy decisions. Tim Waterer, Chief Market Analyst at KCM Trade, wrote in a research report: "Rising global bond yields have become the dominant narrative in financial markets this week. Higher yields are detrimental to economic growth and corporate profits, and it's hard to imagine risk assets steadily rising while yields are climbing out of control."

The surge in AI-driven debt issuance exacerbates pressure on the bond market.

This round of bond sell-offs is not entirely driven by geopolitics; large-scale financing activities in the technology sector are also a structural force that cannot be ignored.

Large tech companies are issuing bonds in rapid succession to support the construction of artificial intelligence infrastructure, further increasing supply pressure in the sovereign debt market. According to Reuters, Naka Matsuzawa, chief macro strategist at Nomura Securities in Tokyo, pointed out that the willingness of mega-tech companies to finance at higher interest rates is driving up yields across all maturities, shifting market focus to whether economic growth can keep pace with rising interest rates. "The AI-driven productivity leap needs to translate into higher wages," he said, adding that only if this can be achieved will the economy be able to withstand higher interest rates.

Saxo's chief investment strategist, Charu Chanana, warned that bond investors are demanding higher inflation and fiscal risk premiums, "which means the sell-off could be overshooted, and it looks increasingly likely that the U.S. 10-year yield will climb to 5% until yields are attractive enough to attract buying again."

Bloomberg strategist Mark Cranfield also pointed out that as US Treasury yields return to October 2023 levels, investors will remember that yields peaked around 5.02% at that time. "Fixed income traders will expect targeted buying in that area if 5% returns."

Fiscal pressures hit the nation hardest, with Japan, Britain, and France being particularly vulnerable.

This round of global yield increases poses an exceptionally severe challenge to sovereign economies whose fiscal situations are already under pressure.

The yield on Japan's 10-year government bonds rose above 3%, a level not seen in 30 years, drawing market attention to Prime Minister Sanae Takaichi and her aggressive investment plans. German government bond futures fell to their lowest level since 2011, French OAT futures fell to a record low, and UK government bond yields hit their highest level since 2008 on Tuesday.

HSBC's chief Asia economist, Fred Neumann, stated that the rise in JGB yields not only reflects investors' concerns about Japan's fiscal outlook but also embodies global pressures on long-term financing costs. Chanana further noted, "Japan and the UK appear to be at the forefront, as rising yields are directly clashing with fiscal pressures and a shift in monetary policy; France, given its debt trajectory, is similarly in a vulnerable position."

Rajeev De Mello, Global Macro Portfolio Manager at Gama Asset Management, summarized: "Bond yields were already rising, and the US-Iran conflict and its impact on oil prices have heightened investor concerns about the bond market. At current levels, higher yields pose a significant headwind for Asian equities, particularly longer-duration technology stocks."

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