Rising oil prices reignite inflation threat, global bond market faces new round of intense selling.

With the escalation of the situation in the Middle East driving international oil prices to break through the $100 mark, inflation concerns have resurfaced, leading to a new round of intense selling in the global bond market. Investors who had previously bet on the bottoming out of the bond market adjustment are once again suffering losses, and major central banks around the world will also face a critical test of credibility. Multiple factors resonate and ignite this round of global bond market adjustment. This week, the UK benchmark bond yield has stayed above 5% for several days in a row, marking the longest record in nearly 20 years; the yield on Germany's 10-year government bonds has reached the highest level since 2011; and the yield on Japan's 10-year government bonds is close to the highest level since the 1990s. The US market is also under pressure, with the 30-year US Treasury yield approaching highs seen since 2007, and short-term US Treasury yields hitting a new high in over a year this week. The intensity of this round of global bond market selling is unprecedented, with the average yield on the Bloomberg Global Sovereign Bond Index, which tracks the performance of investment-grade sovereign bonds in various countries, soaring to 3.68%, surpassing the high point from three years ago and reaching the highest level since the global financial crisis of 2008. The benchmark index is currently facing its largest monthly decline since March. Yields are rising globally, both in the long and short end of the bond market, indicating significant pressure on the market as a whole. In addition to this, the possibility of more geopolitical news emerging this weekend, and the heavyweight interest rate decisions to be made by the Federal Reserve, the Bank of Japan, and the Bank of England next week, further increases uncertainty in the global bond market. If the trend of selling in the bond market continues to intensify, it will trigger a series of chain risks: global debt sustainability issues will become more prominent, global corporate financing costs will increase further, and market funds may begin to shift from the stock market to other assets, causing cross-asset volatility. "Many factors are at play," said Torsten Slok, Chief Economist at Apollo Global Management, regarding the rise in global sovereign bond yields. "The continuous rise in oil prices is posing policy challenges for major central banks such as the Federal Reserve, the European Central Bank, and the Bank of England." Since the beginning of this year, the global bond market has suffered heavy losses due to the surge in energy prices triggered by the conflict in the Middle East. While a glimmer of hope appeared with the ceasefire between the US and Iran in June, international oil prices briefly fell. However, the situation in the Middle East escalated again this month, causing oil prices to rebound. On Thursday, Brent crude oil prices successfully broke through the $100 per barrel mark, and the risk of inflation rising once again looms. The Federal Reserve's hawkish turn suppresses the bond market, and the reforms of Chair Kevin Warsh intensify market volatility. In addition to the risk of energy inflation, the resilience of the US economy continues to pressure the bond market. The US labor market and economic growth data remain robust, causing market expectations for the Federal Reserve's monetary policy this year to shift from rate cuts to rate hikes. At the same time, the communication mechanism reform implemented by the new Federal Reserve Chair Kevin Warsh has further amplified market volatility. The new framework significantly reduces forward guidance content from the central bank, meaning that the adjustment of Federal Reserve policy may happen earlier than previously expected by the market, increasing uncertainty significantly. Currently, market pricing shows that the probability of a rate hike at the Federal Reserve's meeting on July 28-29 has risen to one in three. "We know that Warsh does not want to provide forward-looking guidance to the market, which is fine," said Mark Cabana, head of interest rate strategy at Bank of America. "But this means that the market is more capable of pricing in the actions that the Federal Reserve should take, or pricing in the actions that might force the Federal Reserve to consider a rate hike." Reducing forward guidance at the Federal Reserve may mean that regardless of its next decision, it may come as a surprise to the market. Since the June Federal Reserve meeting, traders have raised their rate hike expectations. The core focus of the market now is whether the Federal Reserve can effectively signal to the market that inflation is under control. After global inflation skyrocketed following the pandemic, catching major central banks off guard, the bond market has still not emerged from the shadow of those impacts. The Bloomberg Global Bond Index remains about 20% lower than its peak in early 2021. Barclays analyst Anshul Pradhan and his team released a research report on Thursday stating, "A rate hike will prompt the market to reevaluate the final rate, making the yield curve flatter. If interest rates remain unchanged but no clear, reasonable policy explanation is given, it is likely to lead to an increase in long-term interest rates." Global central banks are in a dilemma, reshaping the pricing of assets in the macroeconomic landscape. The current bond market sell-off has spread globally, and the Asian markets have not been spared. Due to concerns that the Bank of Japan's monetary policy tightening speed is insufficient to restrain inflation pressures caused by yen depreciation, the yield on Japan's 10-year government bonds continues to climb. While Japanese central bank officials may signal an accelerated rate hike before the meeting next week, it has not effectively eased concerns in the bond market. British traders will closely watch the latest economic forecasts from the Bank of England and statements from Governor Andrew Bailey, as the market currently unanimously expects the Bank of England to raise rates twice this year. The Bank of England is currently in a policy dilemma: rising energy prices bring inflation risks, but weak domestic employment market and sluggish economic growth make it difficult to balance monetary policy between stimulating the economy and controlling prices. The Australian bond market is also under significant pressure. Australia's benchmark yield currently ranks first among developed economies globally, with the risk of further increases. Next week's inflation data and a speech by RBA Governor Philip Lowe could consolidate market expectations for the RBA to raise policy rates for the fourth time this year. Prajjwal Kumra, a strategist at TD Securities in London, pointed out the common dilemma faced by central banks worldwide: all publicly available economic data lag behind and cannot accurately reflect the true trends of the current economy and inflation, leading major central banks to be in a difficult position in making policy decisions. The bond market adjustment has led to significant losses for investors. The iShares 20+ Year Treasury Bond ETF, a mainstream long-term investment tool under BlackRock, has seen its net asset value drop by nearly 5% in the past month, with a cumulative decline of over 50% since 2020. "We believe we have entered a new macroeconomic environment," said Archie Siese, Chief Credit Officer at Moody's in New York. This means "structural inflation is rising, interest rates are rising, fiscal deficits are growing, and global uncertainties are gradually shifting from the social level to the government level, ultimately reflected in the balance sheets of governments around the world."