Bond Markets in Crisis as Lenders Demand Higher Yields Amid Inflation Fears

Global bond markets are experiencing a rout as lenders demand higher yields to compensate for inflationary pressures. The benchmark 10-year U.S. Treasury yield hit a three-year high of 4.9708% in Asia, closing in on the key 5% level that could disrupt the stock market and slow the economy.

Australian bond yields have reached 15-year highs, while New Zealand swap rates surged 22 basis points. Even Japan's benchmark government yield lifted 9 bps as traders bet central banks will need to hike interest rates to keep inflation under control.

The main culprit behind the price surge is Brent crude, which has rebounded above $108 a barrel and is up over 50% from its July lows. The Strait of Hormuz remains shut, and the Bab al-Mandab Strait at the southern end of the Red Sea is at risk of falling to Houthi control, forcing shipments to reroute through the Suez Canal and around Africa.

Asian shares are deep in the red, with Japan's Nikkei and South Korea's KOSPI off over 2%. European bourses are expected to have a calmer open, given yields there had already hit multi-decade highs overnight. Wall Street futures were little changed in Asia, awaiting the arrival of more liquidity.

The U.S. CPI data is now hanging on the outcome, which could seal the case for an interest rate rise next week. Forecasts are centered on a 0.2% monthly rise in the core measure of CPI, but the Fed decision may boil down to the second or third decimal place in the figure.