Renewed US-Iran tensions spark inflation concerns, Brent oil rises to $95, global bond market faces heavy sell-off, Korean stocks drop 4%

The global bond market is undergoing the most intense sell-off in decades. With the resurgence of US-Iran military clashes and a sharp rise in oil prices, both inflation concerns and rate hike expectations are intensifying. Yields in major markets such as US Treasuries, Japanese government bonds, and Australian bonds have all surged to their highest levels in ten or even several decades, putting simultaneous pressure on Asia-Pacific equities and significantly heightening market worries about the outlook for risk assets.

The yield on the US 10-year Treasury rose to 4.81%, hitting a nearly three-year high and further approaching the psychologically important 5% level. At the same time, the yield on Japan's 10-year government bond broke through 3% for the first time since 1996, and Australia's 10-year yield rose to 5.25%, a high not seen since 2011. Brent crude rose 1% to $95.61 per barrel, diesel prices climbed to the highest level in more than four months, and European natural gas prices also hit their highest since 2023.

The sudden cooling of market sentiment has had a direct impact on equities. The MSCI Asia Pacific Index fell 2% to near a one-week low, the Korea Composite Stock Price Index widened its loss to 4%, SK hynix and Samsung Electronics both fell more than 4%, and the Nikkei 225's daily decline also expanded to 3%. European futures are similarly indicating further weakness.

"The weak market sentiment this morning is clearly a result of renewed concerns over the Strait of Hormuz and the dual headwind of rising global bond yields," said Homin Lee, Senior Macro Strategist at Lombard Odier in Singapore. He remains constructive on Asia-Pacific markets, especially North Asia, citing "still solid earnings fundamentals."

• Korea's KOSPI Composite Index extended its decline to 4%, with SK hynix and Samsung Electronics both falling by over 4%. The Nikkei 225's daily loss also expanded to 3%.
• The US 10-year Treasury yield climbed to 4.81%, reaching a near three-year high.
• Japan's 10-year government bond yield surpassed 3% for the first time since 1996, while Australia's 10-year yield rose to 5.25%, the highest since 2011.
• German bund futures fell to their lowest since 2011, French OAT futures dropped to a historical low, and UK gilt yields hit their highest levels since 2008 on Tuesday.
• Brent crude rose 1% to $95.61 per barrel, having surged almost 6% in the previous session and progressing toward a fourth consecutive day of advances.
• Diesel prices surged to the highest in more than four months, while European natural gas prices also hit their highest since 2023.
• Spot gold fell 0.5% to $4,306.90 per ounce.
• Bitcoin rose by 0.1% to $77,508.32.

The immediate trigger for the new wave of selling came from the abrupt escalation in Middle East tensions. The US military confirmed a series of strikes on Iran, and Iran immediately announced a missile attack on a US airbase in Jordan. This exchange of fire broke weeks of relative calm—the Trump administration had previously shifted its Iran policy focus from military action toward economic pressure.

The energy market responded swiftly. Brent crude rose 1% to $95.61 per barrel after surging almost 6% in the previous session, setting up a fourth consecutive day of gains. Diesel prices jumped to a more than four-month high and European natural gas prices also reached their highest since 2023, as markets worried about the risk of disruption to the Strait of Hormuz energy corridor.

"The weak market sentiment this morning is clearly a result of renewed concerns over the Strait of Hormuz and the dual headwind of rising global bond yields," said Homin Lee, Senior Macro Strategist at Lombard Odier in Singapore. He remains constructive on Asia-Pacific markets, especially North Asia, citing "still solid earnings fundamentals."

Soaring energy prices are compounding already elevated inflation pressures, driving the market to sharply upgrade expectations for interest rate hikes by key global central banks.

After Federal Reserve Chair Kevin Warsh delivered a hawkish speech at the Jackson Hole symposium last week, the market-implied probability of a Fed rate hike in September has risen to about 70%. Swaps markets almost fully price in a European Central Bank rate hike on September 10, assign a 65% chance to a Reserve Bank of Australia hike on September 29, and have fully priced in Bank of Japan action on September 18. At the same time, the yield on the US 2-year Treasury moved up in tandem to 4.41%, the highest since January 2025.

Krishna Guha, Vice Chairman and Head of Central Bank Strategy at Evercore ISI, bluntly stated that the current Federal Reserve's primary focus is inflation, and the influence of oil prices and bond yields on policy decisions has surpassed that of employment data. Tim Waterer, Chief Market Analyst at KCM Trade, wrote in a note, "The surge in global bond yields has become the central theme in financial markets this week. Higher yields are negative for economic growth and corporate profits, making it hard to imagine risk assets moving steadily higher amid runaway yields."

This bond sell-off is not driven entirely by geopolitics; large-scale financing activities in the tech sector are also an undeniable structural force.

Big tech companies are aggressively issuing debt to fund artificial intelligence infrastructure, further adding supply pressure to sovereign bond markets. According to Reuters, Naka Matsuzawa, chief macro strategist at Nomura in Tokyo, noted that mega tech firms are willing to borrow at higher rates, pushing up yields across maturities. The market's focus has shifted to whether economic growth can keep pace with rising interest rates. "The productivity leap from AI needs to be translated into higher wage levels," he said. Only then would the economy be able to withstand higher interest rates.

Charu Chanana, Chief Investment Strategist at Saxo, warned that bond investors are demanding greater premiums for inflation and fiscal risks. "This means the sell-off may overshoot, and a 5% yield on US 10-year Treasuries looks increasingly likely, until yields become attractive enough to draw buyers back in."

Bloomberg strategist Mark Cranfield also pointed out that as US Treasury yields return to October 2023 levels, investors will recall that yields peaked around 5.02% back then. "Fixed income traders will expect directional buying to emerge if 5% is retested."

This wave of rising global yields poses a particularly severe challenge for sovereign economies already under fiscal strain.

Japan's 10-year government bond yield breaking above 3%—a level unseen in three decades—has turned market attention to Prime Minister Sanae Takaichi and her aggressive investment plans. German bund futures fell to their lowest since 2011, French OAT futures slipped to a historic low, and UK gilt yields hit their highest on Tuesday since 2008.

Fred Neumann, Chief Asia Economist at HSBC, said the rise in JGB yields reflects not only investor worries over Japan's fiscal outlook but also the global pressure on long-term financing costs. Chanana further noted: "Japan and the UK appear to be on the front line, as rising yields are directly colliding with fiscal stress and shifting monetary policy; France is also in a vulnerable spot given its debt trajectory."

Gama Asset Management global macro portfolio manager Rajeev De Mello summed up: "Bond yields were already rising, and the US-Iran conflict’s impact on oil prices is causing growing concern among investors about the bond market. At current levels, higher yields are a clear headwind for Asian equities, especially for long-duration tech stocks."