Yield Hopes Rise Amid Ongoing Conflict-Driven Inflation Fears

Bond markets took a breather on Thursday, as yields in the US and Japan edged lower. However, this slight reprieve does not change the overall picture for debt investors.

The ongoing conflict between the US and Iran has kept oil prices above $90 a barrel, fueling inflation fears that have prompted central banks to tighten monetary policy.

The Federal Reserve's odds of raising interest rates by 25 basis points this month have increased to about 67% from 37% last week, according to CME Group's FedWatch tool. However, Federal Reserve Bank of New York President John Williams tempered these expectations slightly, stating that rising long-term bond yields are a reflection of a solid economy.

Markets will be watching the upcoming ADP labour figures on Thursday and Friday's more reliable nonfarm payroll report. The next major data point will be consumer price index figures on September 11. The European Central Bank and the Bank of Japan also have inflation concerns, with Japan's services sector expanding at its fastest pace in five months in August.