Oil surge past $100 sparks global bond selloff, rate hike bets

A week of escalating conflict in the Middle East sent oil prices surging past $100 a barrel, triggered a global bond selloff that pushed yields to multi-year highs, and left markets bracing for the Federal Reserve to raise interest rates as soon as next week.

Brent crude hit a four-month high of $109.97 a barrel on Friday before pulling back, while West Texas Intermediate topped $104 intraday — levels not seen since May. The rally, which saw both benchmarks gain more than 7% for the week, was driven by intensifying U.S.-Iran clashes around the Strait of Hormuz, where vessel transits fell to just seven on Thursday from a pre-war average of roughly 15. Iran-aligned Houthi forces compounded the crisis by seizing Yemen's port city of Mocha, threatening a second critical shipping chokepoint at the Bab al-Mandeb Strait.finance.yahoo+2

Bond Yields Hit Multi-Year Highs

The energy shock rippled through global debt markets. The benchmark 10-year U.S. Treasury yield briefly touched 4.99% — its highest since late 2023 — while the 30-year yield climbed above 5.37%, a level not seen since 2007. Two-year yields surged 16 basis points on Thursday in their largest single-day move since the April 2025 tariff-driven market meltdown.businesstimes+1

Treasury Secretary Scott Bessent's efforts to calm markets through expanded bond buybacks fell flat. His department purchased just $5.19 billion of 10- to 20-year debt on Thursday, below the $6 billion cap he had announced, deepening trader skepticism. "Bessent is bringing a squirt gun to a firefight," said George Catrambone, head of fixed income at DWS Americas.businesstimes

The European Central Bank raised its deposit rate by 25 basis points to 2.50% on Thursday, warning that inflation would persist above 2% for an "extended period". JPMorgan ↗ 0.76% analysts said they expected eight of nine developed-market central banks to hike rates before year-end.tradingview+1

CPI Cements Fed Hike Expectations

Friday's U.S. consumer price index report showed headline inflation rose 0.4% month-over-month in August, with the annual rate holding at 3.4%. Core CPI increased 0.3% monthly, a tenth above consensus, following a hotter-than-expected producer price report the day before that showed annual wholesale inflation accelerating to 5.4%.investing+2

Markets moved quickly. The probability of a quarter-point Fed rate hike at the September 15–16 meeting jumped to roughly 85–91% after the data, up from around 67–69% beforehand, according to the CME FedWatch tool. Fed Chair Kevin Warsh will hold a press conference following Wednesday's policy announcement.marketscreener+2

A Glimmer of De-escalation

Oil prices retreated more than 3% on Friday after the Financial Times reported that Oman was spearheading a meeting of Gulf states and Iran over restoring commercial shipping through the Strait of Hormuz, scheduled for Monday in the Omani city of Salalah. UBS energy analyst Giovanni Staunovo cautioned that near-term risks remained tilted to the upside.energynow+1

Wall Street rebounded on the retreat in crude, with the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all rising more than 1%, though the major indexes remained on track for weekly losses. Asian markets fared worse: Japan's Nikkei 225 fell 2.8%, South Korea's Kospi dropped 2.7%, and the MSCI Asia Pacific index declined 1.3%.investing+2

The International Energy Agency warned Friday that normal Middle East oil flows may not return until 2027. As Quintex Intel's Stephen Innes put it: "Temporary inflation, temporary supply shocks, temporary geopolitical premiums — markets are generous with temporary problems because they can look through them, but what they hate is when temporary begins overstaying its visa, and oil is starting to do exactly that".finance.yahoo+1