On Monday, oil prices increased and global bond markets experienced volatility due to rising tensions in the Middle East, which sparked concerns about inflation and speculation that central banks may need to hike interest rates. Brent crude, the international oil benchmark, saw a rise following an attack on a nuclear power plant in the United Arab Emirates. This development coincided with stalled peace negotiations between the US and Iran, which have been ongoing for six weeks amid a ceasefire. Former President Donald Trump commented on social media, urging Iran to act swiftly or face severe consequences.
Brent crude peaked at $111.16 per barrel, marking its highest point in nearly two weeks, before settling around $110 after Iran indicated it had responded to a new US initiative aimed at ending the conflict. Iran’s foreign ministry spokesperson, Esmaeil Baqaei, mentioned that discussions were ongoing through a Pakistani mediator, though details were sparse. Meanwhile, global bond markets were unsettled, with the US 10-year Treasury yield reaching 4.631%, its highest since February 2025, before easing to 4.599%. In the UK, the 10-year gilt yield climbed to 5.19%, surpassing an 18-year high before retracting slightly.
The volatility in UK government bonds is also attributed to political uncertainty, as speculation grows that Prime Minister Keir Starmer might face a leadership challenge from Manchester Mayor Andy Burnham later this year. These fluctuations occurred as UK Chancellor Rachel Reeves joined other G7 finance ministers in Paris to address the economic repercussions of the Middle Eastern conflict. Mohit Kumar, a chief economist at Jefferies, expressed concerns among bond investors about a potential “shift to the left” in the UK, which could exacerbate fiscal challenges.
According to Kumar, the UK fiscal situation is already strained, with the government struggling to implement spending cuts. A leftward shift could lead to increased public spending, despite limited fiscal capacity, and further tax hikes might not generate additional revenue. Kathleen Brooks, research director at XTB, hinted at a possible recovery in UK bond yields if markets perceive Burnham as moving away from high spending. She noted that a key test will be whether the 10-year yield can dip below 5% and whether the 30-year yield shows enough confidence to retreat from 1998-level highs.
Elsewhere, Japan’s bond yields rose, with the 10-year yield hitting nearly a 30-year high at 2.8%, as the government readied new debt issuance to mitigate the economic impact of the Middle Eastern conflict. European stock markets opened lower, with the Stoxx Europe 600 index dropping 0.7%, while the UK’s FTSE 100 remained largely unchanged. In Asia, Japan’s Nikkei index fell by about 1%, and Hong Kong’s Hang Seng index also saw a 1% decline, whereas South Korea’s Kospi closed 0.3% higher.