Oil prices were volatile on shifting headlines around Iran and the Strait of Hormuz. Global yields rose further, with curves steepening in the US and Europe

Global bond yields continued to rise overnight, although the sell-off eased from the previous session. Bond market weakness weighed on broader risk sentiment, with US equity futures soft through European trading before recovering on hopes of an agreement to restore energy flows through the Strait of Hormuz. The S&P 500 is close to flat in afternoon trading, while major European indices closed modestly lower. The US dollar strengthened against most G10 currencies, and sovereign bond yields are broadly higher.

Oil prices were volatile overnight. Brent crude futures initially rose above US$108 per barrel after a senior Iranian military official warned that Tehran could broaden the conflict to the Indian Ocean if the US or Israel launched further attacks. Separately, Houthi forces renewed attacks on Saudi Arabia. Brent subsequently fell sharply to around US$104 after Reuters reported that the US and Iran were exploring a phased agreement to reopen the Strait of Hormuz but the dip proved temporary.

Moves in US rates broadly tracked oil prices, with little economic data to provide an independent lead. Initial jobless claims were steady at 197k. The Treasury curve steepened. Despite a sizeable trading range at the front end, 2-year yields were little changed, while longer-dated yields rose. The 10-year yield reached 5.16%, while the 30-year yield climbed 5bp to 5.44%, its highest level since 2004. A 7-year Treasury auction tailed by almost 1bp - a weak result, but nonetheless an improvement on the particularly poor 5-year sale the previous day.

The Ifo expectations index rose to 90.4 in September, with the institute’s president saying the recovery was continuing across most sectors. The improvement was consistent with the firmer PMI readings released earlier in the week. The Ifo Institute has upgraded its 2026 GDP growth forecast to 1.3%. Meanwhile, 10-year Bunds extended their recent sell-off, with yields rising 4bp to 3.60%.

The US dollar index advanced, largely reflecting yen weakness, while the euro also edged lower. The DXY has posted solid gains this month and is approaching the 2026 highs reached in June and July. USD/JPY traded above 159, leaving the market alert to any official response after the Bank of Japan reportedly conducted a rate check near this level a few days earlier. NZD/USD dipped towards 0.5650, approaching its June low for the year of around 0.5625, while NZD/JPY traded above 90.

The Australian unemployment rate climbed to 4.6% last month, above the consensus estimate for it to remain steady at 4.5%. Employment rose by 40k, double the expected 20k gain, although most of the increase was in part-time jobs. The participation rate increased to 67.1% from 66.9%. The report is the final major economic release ahead of the 29 September RBA meeting. The central bank is widely expected to raise rates next week, although market pricing dipped slightly after the release though remains overwhelmingly in favour of a 25bp hike.

NZ fixed income yields rose significantly across both the swap and government curves yesterday, reflecting the move higher in offshore markets. The 2-year swap rate closed 12bp higher at 4.11%, having retraced marginally from the session highs after the Australian labour market data. The NZ curve shift was largely parallel, with the 10-year rate ending the session 12bp higher at 4.74%. The weekly NZGB tender attracted decent demand, with yields at multi-year highs. Both nominal lines cleared below prevailing market yields, though metrics suggests greater demand for the May-2031 line.

Australian 10-year bond futures are about 3bp higher in yield terms relative to the local close pointing to further upside pressure for NZ rates on the open.

The data calendar is light into the end of the trading week. There are no domestic or regional economic releases, while US durable goods orders and consumer sentiment are due this evening.

Stuart Ritson is a senior Markets Strategist at BNZ Markets.