Rising bond yields and surging yen rattle global markets

A surging Japanese yen and climbing global government bond yields pressured risk assets broadly on Tuesday, with Bitcoin ↘ 0.07% weakening around $78,000 as markets grew wary of a potential unwinding of the yen carry trade. The moves came as oil prices neared $100 a barrel amid escalating Middle East tensions, compounding inflation fears ahead of key U.S. data later this week.

Bond Yields Near Multi-Year Highs

The yield on the benchmark 10-year U.S. Treasury note touched 4.81% on Tuesday, near its highest level since late 2023. Borrowing costs surged across the globe: Germany's 10-year bund yield hit 3.39%, its highest since 2011, while French 30-year government bond yields reached levels not seen since April 2008. Yields in the U.K. and Japan also hovered around multi-year or multi-decade highs.barchart+3

The dollar-yen exchange rate fell as low as 152.99 intraday, pushing the Japanese currency to its strongest level against the dollar since February. The yen's appreciation raised concerns that the carry trade — in which investors borrow cheaply in yen to fund riskier investments — could begin to unwind, a scenario that rattled markets last summer.bloomingbit+1

Bitcoin fell more than 1% over the prior 24 hours, while gold slipped roughly 1% to around $4,390 an ounce. The S&P 500 dipped 0.2% in early trading, and the Dow Jones Industrial Average fell roughly 477 points, though the Nasdaq Composite was buoyed slightly by strength in chip and AI infrastructure stocks.bnnbloomberg+2

Oil Prices Add to Inflation Worries

Brent crude rose to briefly touch $99.46 a barrel on Tuesday before settling near $98, after Saudi Arabia said fresh attacks had halted operations at several energy facilities in the kingdom's south. Iran-backed Houthi militants claimed responsibility for targeting the 400,000-barrel-a-day Jazan refinery. West Texas Intermediate crude climbed toward $95.barchart+2

The oil surge has worsened an already fraught inflation picture. U.S. consumer price data for August, due Friday, is expected to show headline inflation easing slightly to 3.3% from 3.4%, while core inflation may dip to 2.4% annually. A wholesale inflation report on Thursday is forecast to show an acceleration to 5.4% from 4.7%.bnnbloomberg+1

Central Banks in Focus

The inflation reports arrive just before the Federal Reserve's September 15–16 meeting, where traders are pricing in roughly a 58%–61% probability of a 25-basis-point rate hike. "A hot inflation report on the back of the strong jobs data would likely tip the balance in favor of a hike, while any moderation in core CPI would push back bets to December," said Raffi Boyadjian of XM.barchart+1

The European Central Bank is widely expected to raise its deposit rate by 25 basis points to 2.50% on Thursday, while the Bank of Japan is also anticipated to hike rates at its meeting next week. Japan's Nikkei 225 fell 1.7% on Tuesday as the stronger yen weighed heavily on exporters.bnnbloomberg+3

"If long-term yields keep climbing toward 5% and beyond, the bond market effectively starts tightening financial conditions on its own," wrote the financial commentary site Investing Live, calling yields "the macro variable that everything else has to trade around".investinglive