The US and Iran are reigniting hostilities! Oil prices have pushed global bond markets to the brink; will stock markets follow suit?

Soaring oil prices are pushing the already fragile global bond market to the brink.

Following the renewed conflict between the US and Iran, Brent crude oil rose 4.5% in two days, bringing its year-to-date gain to 51%. Impacted by this, yields on 10-year German, British, and Japanese government bonds hit their highest levels since 2011, 2008, and 1996 respectively on Tuesday, while the yield on 10-year US Treasury bonds also climbed to a level rarely seen since the financial crisis. Faced with market turmoil, US Treasury Secretary Bessenter publicly stated at the G20 summit that high yields were a sign of a strong economy and promised, "We will eventually get through this"—but the market did not buy it.

The core risk of the current situation lies in the fact that years of fiscal stimulus and military spending have significantly weakened the fiscal foundations of major industrialized nations, while rising oil prices are spreading inflationary pressures from the energy sector to broader consumer goods prices. According to the Wall Street Journal, in the Federal Reserve's preferred basket of inflation indicators, 54% of goods saw year-on-year price increases exceeding 3%, far higher than the historical average of approximately 32%. The question investors now face is: if the CPI data on September 11th exceeds expectations, or if the Federal Reserve fails to raise interest rates at its subsequent meeting, can the pressure on the bond market be absorbed without impacting the stock market?

Oil prices were the trigger for this round of bond market sell-off.

The immediate trigger for this round of synchronized declines in global bond markets was the renewed military conflict between the US and Iran. Brent crude oil rose 4.5% in two trading days, bringing its year-to-date gain to a staggering 51%.

The sharp rise in energy prices is exacerbating inflationary pressures worldwide. The eurozone's inflation rate accelerated to 3.3% in August from 2.9% in July, exceeding expectations. Analysts point out that the global synchronization of this round of bond market sell-offs indicates that the driving force comes from the global factor of oil prices, rather than the fiscal problems of any single country.

Analysts believe that the fiscal situation of major industrialized countries has deteriorated significantly due to years of fiscal stimulus and military spending following the COVID-19 pandemic and the Russia-Ukraine war, with accumulated deficits acting as "dry tinder," and the resurgence of the war in Iran being the ignition point.

Bessant: High yields are a sign of a strong economy; fiscal consolidation may take months.

Facing market pressure, Bessant defended the current situation at a G20 press conference in Asheville, North Carolina. He attributed the current high yields to three factors: robust economic growth, a "temporary inflationary shock" caused by rising energy prices, and a surge in capital expenditures driven by the artificial intelligence investment boom.

Bessant stated that AI-related capital expenditures have created a "dilemma" for the bond market in the short term, but in the long run, these investments will bring significant productivity gains and are expected to ultimately generate a "strong anti-inflationary effect," driving down inflation and long-term yields.

On fiscal consolidation, Bessant said on Monday that a comprehensive package of measures might not be available for weeks or even months, dashing market expectations for swift government action to reduce the deficit. He also said that oil prices would eventually fall, but "it's hard to say whether it will be today, tomorrow, or next week."

The Fed's stance and inflation data are key variables.

With fiscal policy unlikely to be effective in the short term, market attention has turned to monetary policy. Federal Reserve Chairman Warsh, speaking at the Jackson Hole conference last week, pointed out that signs of spreading inflation are emerging—among the Fed's preferred inflation gauges, 54% of commodity prices have risen by more than 3% year-on-year, far exceeding the historical average of about 32%, indicating that rising energy prices are permeating broader inflationary pressures. Warsh stated that the Fed is prepared to take action to curb inflation.

However, in an interview with CNBC, Bessant stated that central banks traditionally do not raise interest rates in response to supply shocks unless a "second- or third-order effect" occurs. This statement creates a subtle tension with Warsh's hawkish signals.

The market is currently facing two key junctures: the CPI data on September 11th and the Federal Reserve's interest rate meeting five days later. If inflation data exceeds expectations, or if the Fed fails to deliver on its promise to raise interest rates, analysts warn that the risk of another market downturn in September will increase significantly.

Will the stock market be the next target of pressure?

During the G20 summit, Bessant was simultaneously navigating multiple fronts: managing the yen's exchange rate against the dollar, stabilizing long-term government bond yields, and dealing with renewed trade tensions with Canada. According to NHK, Bessant stated during a meeting with the Bank of Japan governor and finance minister, "Japan needs to make it clear to the market that it is moving towards higher interest rates and fiscal sustainability."

Analysts point out that before the situation in the Persian Gulf stabilizes, the central bank's efforts to tighten policy and consolidate fiscal policy may only have a marginal effect. With persistently high oil prices and rising inflation expectations, the pressure on the global bond market is unlikely to reverse in the short term, and if the pressure on the bond market spreads further, the stock market will become the next target of pressure.

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