Oil prices surged to their highest point since May on Thursday as fighting intensified in the Persian Gulf and investors braced for a war in Iran that looks likely to drag on far longer than markets initially expected.
Brent crude futures pushed above $107 a barrel, while U.S. West Texas Intermediate crude neared $102. Energy prices have been climbing for weeks on fears of a near-term supply contraction, and that climb picked up speed this week.
Government bond yields are also spiking. The yield on the 10-year U.S. Treasury note rose 0.082 percentage points to 4.922 percent, matching the post-pandemic highs set during the inflation surge that forced the Federal Reserve into an aggressive rate-hiking campaign.
Shorter-term debt moved even more sharply. The 2-year Treasury yield jumped 0.114 percentage points to 4.541 percent, a sign that traders are pricing in more Fed rate hikes ahead.
The pain isn’t confined to American markets. Bond yields rose in Germany, the United Kingdom, France, and Japan as well, reflecting a global repricing of risk and inflation expectations.
Rising yields mean falling bond prices — investors are demanding a bigger return to hold government debt, whether because they expect higher inflation, see better returns elsewhere in stocks or corporate bonds, or anticipate tighter monetary policy from central banks.
Stocks took the hit directly. Every major U.S. index was down roughly six-tenths of a percentage point Thursday morning. Nine of the eleven S&P 500 sectors declined; consumer staples was the only sector in the green, and communications services was flat.
Adding to the pressure, the European Central Bank raised interest rates Thursday and signaled it expects inflation to stay above its 2 percent target for an extended stretch. Meanwhile, traders in the fed funds futures market pushed up the odds of a Fed rate hike next week by eight points, to 69.6 percent.
