Oil Prices Surge Amid Rising Tensions with Iran
Markets are finally acknowledging the impact of the Iran war on oil prices, which have been rising steadily since July. The price of a barrel of Brent crude oil has reached $95, up from the low $80s just last month.
The increase in oil prices is driving up inflation expectations and affecting government bond yields. Investors are demanding higher interest rates to compensate for the expected erosion of purchasing power due to higher energy costs.
Government bonds around the world are reaching multiyear highs, including the UK's 10-year gilt, which has hit its highest level since 2008. Japan's government bonds have also reached their highest level since 1996.
The rising price of oil is a key factor pushing bond yields higher and worrying policymakers in developed countries. The correlation between oil prices and 10-year Treasury yields is at its strongest in five years, according to Morgan Stanley.