International crude prices extended their advance on Tuesday as diplomatic efforts to reopen the Strait of Hormuz stalled, reviving inflation concerns that have sent government bond yields to levels not seen in years. Brent crude, the global benchmark, gained nearly 2% to trade above $107 a barrel, a sharp jump from roughly $72 in late February before the outbreak of hostilities between the US and Iran.
The optimism that Middle East tensions might ease was dashed over the weekend when President Donald Trump rejected Tehran's offer of a seven-day truce. Mediators are still working with both sides on a broader agreement that would end the fighting and restore shipping through the strait, a vital artery for global oil supplies, according to officials quoted by the Associated Press. Iran has proposed reopening the waterway if Washington lifts its blockade of Iranian ports and eases sanctions, among other conditions. The US insists that any deal must also address Iran's nuclear programme, and the two sides remain at odds over the sequencing of concessions.
The disruption to shipping has already affected global trade and added to price pressures. West Texas Intermediate, the US benchmark, rose 1.8% to more than $94 a barrel. Higher energy costs are feeding through to consumer prices, prompting markets to expect another interest-rate increase from the Federal Reserve at its meeting later this month.
Bond markets under pressure
The prospect of tighter monetary policy has triggered a sell-off in government bonds, pushing yields to multi-year highs. The benchmark 10-year US Treasury yield climbed above 5.27% on Monday, its highest level in 19 years, after a rise of nearly half a percentage point through September. The two-year yield has risen even more sharply, gaining more than 0.57 percentage points this month to approach 5%. In Europe, Germany's 10-year Bund yield reached 3.62%, its highest since June 2009.
Rising yields translate into higher borrowing costs for governments, businesses, and households across the continent, from mortgages to corporate loans. They also make equities less attractive relative to fixed-income assets, a factor that weighed on stock markets on both sides of the Atlantic. All three main Wall Street indexes fell on Monday, and Asian markets followed suit on Tuesday: Japan's Nikkei 225 lost 1.3%, South Korea's Kospi declined 0.9%, and Hong Kong's Hang Seng dropped 0.6%. In Europe, early trading pointed to a subdued open, with investors eyeing the upcoming US inflation and jobs data that could influence the Fed's decision.
In a sign of the global reach of the bond rout, Japan's 40-year government bond auction drew its strongest demand since 2020, as relatively high yields attracted investors, according to Bloomberg. The Reserve Bank of Australia raised its key interest rate by 0.25 percentage points to 4.6%, a 15-year high, citing rising fuel costs as a driver of inflation.
The dollar edged up to 157.42 yen, while the euro slipped to $1.1362. Gold remained near $4,160 after steep losses on Monday, as expectations of further rate hikes weighed on the non-interest-bearing metal.
For Europe, the combination of elevated oil prices and higher bond yields poses a fresh challenge. The continent is already grappling with thin gas reserves and high energy prices as winter approaches, and any sustained rise in crude will add to the cost-of-living pressures that have dominated political debate from Paris to Warsaw. The European Central Bank, which has been fighting inflation with its own rate increases, will be watching the bond market closely; a further rise in yields could tighten financial conditions across the eurozone, potentially slowing growth.
Meanwhile, the diplomatic standoff over the Strait of Hormuz continues to cast a shadow over global supply. Analysts warn that a prolonged closure could push oil prices even higher, feeding inflation and forcing central banks to keep rates elevated for longer. The coming days will be crucial, as mediators press for a breakthrough and investors brace for more volatility.
