GLOBAL MARKETS-Bond selloff deepens and stocks drop as oil prices stoke inflation fears

​Global bond yields hit major new highs on Tuesday as renewed fighting in the Middle East lifted oil prices and traders braced for interest rate hikes, putting pressure on stock markets around the world. Japan's 10-year benchmark yield hit 3% for the first time since 1996, pushing up ‌government borrowing costs, as investors also fretted about ever higher public debt.

Britain's 10-year yield hit its highest since 2008 above 5.25%, while the equivalent German yield rose to a 15-year high at 3.36%. "I think there is now something of a sense of resignation — tinged with helplessness — about rising interest rates," said Ryutaro Kimura, a senior strategist at BNP Paribas Asset Management in Tokyo, of the march upward in ‌Japanese borrowing costs, which for years have been a reliable anchor for world markets.

Higher oil prices and renewed U.S.-Iran fighting are stoking worries about inflation, which is negative for bonds, while Federal ‌Reserve Chair Kevin Warsh gave a speech last week that has led traders to raise their bets on U.S. rate hikes this year. The 10-year U.S. Treasury yield, a benchmark for prices across asset classes, rose to 4.8% — its highest since early 2025.

"I think really most of this (bond) sell-off has been a re-assessment of Fed policy," said Andrew Lilley, chief rates strategist at Barrenjoey, an investment bank in Sydney. "I think the Fed hikes in September, and I think it's the beginning ⁠of the ​three-rate hike cycle at minimum."

Data on Tuesday showed ⁠euro zone inflation rose back above 3% in August due to higher energy costs, bolstering the case for a September rate hike from the European Central Bank. STOCKS WILT AS BORROWING COSTS RISE

U.S. stock futures fell as bond yields ⁠and oil prices rose, with contracts for the S&P 500 down 0.6%. Europe's continent-wide STOXX 600 index fell 0.5%. Hong Kong's Hang Seng dropped 1%, with the weak tone set by the lacklustre debut of clothier Shein ​Global — its shares fell as much as 10% but ended flat on the day.

Higher yields could put pressure on tech companies that are borrowing massively in bond markets to ⁠fund AI investments, said Aneeka Gupta, a senior strategist at WisdomTree. "The higher yields go, the bigger strain it provides to this particular sector, which is one of the largest growth drivers of equity markets," she said. "I think that is resulting ⁠in ​that spillover that is taking place in equity markets today."

Rising oil prices were driving global bond yields higher on Tuesday as renewed conflict in the Middle East dimmed prospects for any reopening of the Strait of Hormuz. Brent crude rose 2% to $92.10, while Europe's benchmark natural gas price climbed towards its highest since early 2023.

U.S. President Donald Trump has threatened further strikes against Iran after the ⁠first exchange of fire in a month. Meanwhile, stepped-up fighting between Russia and Ukraine has pushed wheat prices up near three-year highs. The U.S. dollar picked up on Tuesday, benefiting from its safe-haven ⁠status as bonds and stocks fell.

The euro ⁠slipped 0.2% to $1.16 and the dollar rose 0.3% against the yen to 160.14. Traders on Tuesday were pricing in a 65% chance of a Fed rate hike in September, according to CME's FedWatch tool, up from 40% a week ago.

Money markets were also fully pricing in a further rate ‌hike from the ECB this month.