US Bond Markets Show Signs of Relief Amid Inflation Fears

Bond markets in the US and Japan showed some relief on Thursday as yields edged lower. Despite this, the overall picture for debt investors remains unchanged.

The escalating strikes between the US and Iran are keeping oil prices above $90 a barrel, fueling inflation fears that have led central banks to tighten monetary policy. The Federal Reserve is now seen with a 67% chance of raising interest rates by 25 basis points this month, up from 37% last week.

Federal Reserve Bank of New York President John Williams tempered expectations slightly on Wednesday, stating that rising long-term bond yields are a reflection of a solid economy and that he wants to see more data before deciding on rates. The next major data point will be the US nonfarm payrolls report on Friday, followed by consumer price index figures on September 11.

The European Central Bank and the Bank of Japan also have their own inflation concerns. Data showed Japan's services sector expanded at its fastest pace in five months in August, supporting evidence that the economy is robust enough to handle a BOJ rate hike. The yen rose to a three-week high, adding to a surge on Wednesday.