Bond rout deepens on Oil and Iran impasse

Preview: US-Iran talks stall again, oil holds near $100, and the 10-year Treasury yield tops 5.2% – its highest since 2007.

Bond market in focus as yields reach multi-decade highs

The spotlight was once again on the deepening sell-off in government bonds yesterday, underpinned by rising oil prices as US-Iran talks hit another impasse after US President Trump rejected an Iranian proposal to end the conflict and reopen the Strait of Hormuz within a week.

While oil prices pared some gains after reports that talks between Washington and Tehran would continue, Iran has said it will not soften its conditions. Let’s be frank: nothing has changed, and oil prices continue to trade around US$100/barrel. Spot gold, however, fell 4% yesterday on rising yields, recording its worst one-day performance since June, with the yellow metal eyeing YTD lows just south of the widely watched US$4,000 level. 

Global yields rose across the curve, most notably pushing the benchmark 10-year US Treasury yield above 5.2% (highest since 2007) and the 30-year to 5.58% (highest since 2002). This shows how far the market has shifted from viewing the energy shock as transitory. Higher oil prices are feeding directly into inflation expectations, prompting central banks to keep tightening policy. 

Greenback to remain supported?

G10 FX started relatively subdued on Monday, though the USD index continued to circle around daily resistance at 101.33. Absorbing offers here would help unlock the door for a run to 101.59, and perhaps the YTD high at 101.80. The greenback’s bid reflects a mix of a hawkish Fed decision (and subsequent Fed speak), rising yields, geopolitical tensions, stronger US data in recent weeks, and positive terms of trade. While US Treasury Secretary Scott Bessent recently hit the wires and essentially suggested that Fed officials keep an ‘open mind’ on rates, recent Fed commentary suggests otherwise, at least for now. 

I think it is fair to say that unless the US and Iran show a stronger commitment to working towards a peace deal, and the Strait opens its doors – thereby lowering oil prices – or the Fed signals a less hawkish path, the USD will remain supported. 

RBA unanimously hikes rates to 4.60%

It is also worth noting that the RBA unanimously voted to hike the cash rate by 25 bps to 4.60% overnight, which raised few eyebrows, as it was fully priced in. The vote split, however, caught some major desks off guard: ANZ and Westpac, which had each anticipated a split vote.

Policymakers pointed to escalating tensions in the Middle East and robust AI-driven demand as global forces pushing prices higher, while domestic inflation has also run hotter than the central bank had anticipated, prompting firms to raise or consider raising prices.

Personally, I did not see much of a tradeable edge here; I was looking for a dovish hike to prompt an unwind in rate pricing further out on the curve, but given the current data, I felt there was little chance of that.

Day ahead

The day ahead brings September US consumer confidence data and August JOLTS job openings. It is no secret that the Fed is more focussed on the inflation side of its mandate; therefore, I do not expect these tier-2 events to move the needle much unless we see marked deviations, which could help reinforce or invalidate Fed rate-hike expectations heading into Friday’s US payrolls number. Tomorrow’s August PCE is the next key inflation read, with September CPI and PPI still to come before the October Fed meeting.