Brent crude pushed above $107, lifting yields and the USD while weighing on equities. Bond yields reached fresh multi-year highs. The ECB hiked rates and delivered hawkish commentary

Global government bond yields rose to fresh multi-year highs as oil prices extended gains, reflecting concern over the Iran conflict and a hawkish ECB hike. Brent crude traded above $107 a barrel, while the 10-year Treasury yield rose above 4.90%, its highest level since October 2023. The move weighed on risk sentiment, with major equity indices lower in Europe and North America and the S&P down about 0.5% in afternoon trading. The US dollar was broadly firmer against G10 currencies, with the NZD and AUD underperforming.

The move higher in oil prices reflects renewed Middle East hostilities and increased risk of a drawn-out conflict. A senior Iranian official said Tehran would not back down in response to the US naval blockade and would escalate strikes if attacks on Iranian territory continued. The Wall Street Journal reported that Trump advisers have privately warned the war could run through to 2029, while Trump said it would not end before the November midterms and that meaningful relief from high gasoline prices was unlikely before then.

Headline US producer prices rose 0.4% in August, reflecting higher energy prices, while core prices increased 0.2%, leaving the annual rate at 4.6%. The readings were close to consensus. PPI components make up around one-third of the core PCE deflator, the Fed’s preferred inflation gauge, with most inputs sourced from CPI. While PPI has unusually been released before CPI this month, the month-to-month relationship between the two is too loose to be useful for forecasting.

Treasury yields rose sharply, led by the front end, with the initial move accelerating alongside higher oil prices. Two-year yields are 13bp higher at 4.56%, while 10-year yields increased 9bp to 4.53%, flattening the 2y/10y curve to 34bp. The long end outperformed, helped by a strong 30-year auction that cleared almost 3bp below prevailing market levels and drew the strongest demand in 25 years. The rise in yields appears to have drawn in investors.

The ECB raised rates another 25bp to 2.50% and struck a hawkish tone, highlighting the risk the inflation shock persists and revising headline and core inflation forecasts higher for 2027 and 2028. The shift increases the risk of further tightening, with Bloomberg reporting ECB officials see October as in play. The ECB’s renewed inflation concern added to the government bond selloff, led by the front end, and pushed 10-year German and French yields to fresh multi-year highs.

The US dollar index rose alongside energy prices and Treasury yields, driving broad-based gains against G10 currencies, though it later pared some of the advance. The euro recovered from its initial decline and is only modestly weaker against the dollar, while growth-sensitive currencies such as the NZD and AUD have remained under pressure. NZD/USD has fallen back towards 0.5800, with the NZD also weaker on the main European crosses.

NZ fixed income sold off sharply during the local session yesterday, reflecting moves in offshore markets and higher energy prices. Two-year rates rose 9bp to 3.81%, returning to the cycle highs reached earlier this month and in July. Short-end rates have now fully unwound the post-MPS rally. The curve broadly maintained its shape, with 10-year rates closing 8bp higher at 4.57%. The government bond tender attracted decent demand across the three nominal lines offered. 10-year NZGB yields increased 9bp to 4.88%.

10-year Australian bond futures are close to 8bp higher in yields terms since the local close suggesting upward pressure for NZ rate on the open.

The August manufacturing PMI is released today. The index eased to 54.3 last month but remained well above its long-term average. Attention this evening will centre on the US CPI report, which is widely seen as pivotal to whether the Fed raises rates next week. Many FOMC members have indicated they would support tightening in the absence of further progress towards the 2% inflation target. The consensus expects core CPI to rise 0.2% m/m, which would lower the annual rate to 2.4%. Michigan consumer confidence data are also due.

Stuart Ritson is a senior Markets Strategist at BNZ Markets.