LONDON/NEW YORK — Global stock markets fell Wednesday, while government bonds extended a sharp selloff, after renewed U.S. military strikes on Iran pushed oil prices to five-week highs and revived fears that higher energy costs could prolong inflation.
Brent crude futures briefly rose above $95 a barrel before easing to $94.87, still up for a second straight day. The rise came after fresh U.S. attacks on Iranian military targets near the Strait of Hormuz and Iranian claims of retaliatory strikes against U.S. assets across the region.
The jump in oil prices added pressure to a global bond market already unsettled by concerns over inflation, government borrowing and expectations that the Federal Reserve may raise interest rates again this month.
The benchmark U.S. 10-year Treasury yield rose to an intraday high of 4.8122%, its highest level since November 2023. The yield on Japan’s 10-year government bond held above 3% for a second day after reaching a three-decade high earlier in the week.
Yields rise when bond prices fall. Higher yields increase borrowing costs for governments, businesses and households, while also making bonds more attractive relative to stocks and other riskier investments.
The market reaction showed how quickly geopolitical risk can feed through the global financial system. A conflict centered on the Strait of Hormuz, one of the world’s most important oil-shipping routes, has become an inflation concern, a monetary-policy concern and an asset-pricing concern at the same time.
Oil shock revives inflation fears
Oil prices became the immediate catalyst for the latest wave of market stress.
On Tuesday, Brent crude settled up $4.16, or 4.6%, at $94.65 a barrel. U.S. West Texas Intermediate crude rose $4.46, or 5.2%, to settle at $90.22. Those were the highest closing levels for Brent since July 24 and for WTI since July 23.
By Wednesday, Brent had briefly pushed above $95 as traders assessed the risk that fighting between the United States and Iran could disrupt energy shipments through the Strait of Hormuz.
The waterway is a major route for oil and liquefied natural gas exports from the Persian Gulf. A sustained disruption could limit supplies from major producers, raise transport and insurance costs, and force buyers to seek more expensive alternatives.
The threat is not theoretical.
Reuters reported that the latest U.S. strikes followed Iranian actions against commercial shipping and U.S. personnel. Two tankers were also reportedly hit while leaving the Strait of Hormuz, adding to concerns that commercial shipping is increasingly exposed to the conflict.
Iran has warned that if it cannot export oil from the Gulf, other countries may not be able to do so either. U.S. President Donald Trump has threatened a stronger response to renewed Iranian attacks, while Treasury Secretary Scott Bessent has said Washington is preparing new sanctions.
“The fresh hostilities raised concerns about prolonged disruptions to energy flows through the Strait of Hormuz,” Ole Hansen, an analyst at Saxo Bank, told Reuters.
For investors, the concern is that higher oil prices could feed into transport costs, manufacturing costs and consumer prices. That would make it harder for central banks to declare victory over inflation and could keep interest rates elevated for longer.
“The recent increase in energy prices has put additional upward pressure on bond yields, which had already been on the rise on the back of some fiscal concerns,” Kiran Ganesh, multi-asset strategist at UBS Global Wealth Management, said.
Global bond rout accelerates
The latest rise in yields did not begin with the Iran conflict. Bond markets had already been under pressure from a combination of heavy government borrowing, persistent inflation concerns and doubts about how much central banks can ease policy.
The U.S.-Iran escalation intensified those fears.
When energy prices rise, investors often expect inflation to remain higher for longer. That expectation can lead traders to sell government bonds, especially longer-dated debt, because fixed interest payments become less attractive when inflation is expected to erode their value.
The result is a rise in bond yields.
In the United States, the 10-year Treasury yield has climbed more than 80 basis points since the beginning of March, reaching 4.79% late Tuesday before moving as high as 4.8122% Wednesday.
The current level matters because the 10-year Treasury yield influences borrowing costs throughout the economy, including mortgage rates, corporate debt, auto loans and some consumer-credit products.
A rise toward 5% could become a more serious problem for equities, investors told Reuters.
The 5% level is considered important partly because it is psychologically significant, but also because it offers investors a relatively high return from what is widely viewed as a lower-risk asset. When yields rise, stocks must compete harder for investor capital.
“Companies that are very dependent on financing will start to feel the pinch at around that level,” Mitch Schlesinger, chief investment strategist at Evermay Wealth Management, told Reuters.
Anthony Saglimbene, chief market strategist at Ameriprise, said a move above 5% could become “a go-to excuse for traders and investors to de-risk a little bit.”
The pressure has not been confined to the United States. Japan’s benchmark 10-year yield held above 3%, a level not seen in roughly three decades, while bond yields in other developed markets also rose.
That synchronized movement is why investors have described the situation as a global bond rout rather than a U.S.-only event.
Stocks retreat across regions
The rise in oil and yields weighed on global equities.
MSCI’s broad index of global stocks fell 0.2% and hovered near a one-month low. Europe’s STOXX 600 index dropped 0.3% after deeper declines in Asian markets.
South Korea’s KOSPI fell nearly 4%, while Japan’s Nikkei 225 declined 2.9%.
The selloff reflected a broad risk-off move rather than a single-country problem. Investors reduced exposure to stocks as higher interest rates, more expensive energy and geopolitical uncertainty combined to cloud the outlook for corporate profits and economic growth.
Technology and other growth-oriented sectors are particularly sensitive to rising yields because much of their value is tied to expectations of earnings far in the future. Higher yields reduce the current value of those anticipated profits in standard valuation models.
“That is essentially an environment where higher rates generally mean the discount rate for stocks goes up,” Kevin Shea, senior equity analyst at BNY Wealth, told Reuters. “Those that generate cash flow in the future have a greater burden of proof to show that they can sustain that growth.”
The risk is especially relevant for companies tied to artificial intelligence, where high valuations have been supported by expectations of strong future revenue from data centers, chips, software and automation.
“There’s a lot of duration risk embedded in the parts of the equity market that have been doing well,” Noah Weisberger, head of equities at BCA Research, told Reuters. “Any perturbation from the bond market can really hit valuations.”
U.S. stock futures pointed to a muted opening Wednesday after Wall Street declined the previous session.
The S&P 500 remains up more than 11% for 2026 and was only about 2% below its Aug. 13 record high as of Tuesday. But the market’s resilience may face a harder test as the strong second-quarter earnings season fades from view and macroeconomic concerns take center stage.
Federal Reserve expectations shift
The conflict has complicated expectations for the Federal Reserve’s Sept. 16 meeting.
Before recent hawkish comments from Fed Chair Kevin Warsh, investors had been weighing whether the central bank might pause or maintain its current policy stance. Warsh’s remarks prompted markets to increase expectations that another rate hike may be needed if inflation pressures remain persistent.
Fed funds futures now imply a 68% chance of a 25-basis-point rate increase this month, according to CME Group’s FedWatch tool. That is up from 37% a week earlier.
Oil’s rally strengthens the argument for caution. A sustained rise in energy prices could flow into headline inflation, forcing policymakers to consider whether tighter policy is needed even if other parts of the economy are slowing.
Markets will now focus closely on U.S. labor data.
The ADP private-payrolls report is due Wednesday, and the monthly nonfarm payrolls report is scheduled for Friday. Strong employment data could reinforce the case for another rate increase. Weaker figures could ease pressure by suggesting that the economy is losing momentum and may not withstand higher borrowing costs easily.
The tension between inflation and growth is at the heart of the market reaction.
If oil remains near $95 or rises further, inflation expectations may continue to climb. If yields rise sharply at the same time, borrowing costs could slow housing, investment and consumer spending. That combination raises the risk of weaker growth even as price pressures persist.
The dollar and safe havens
The U.S. dollar edged higher as yields rose.
The dollar index, which measures the greenback against six major currencies, was up 0.05% at 99.734, near its highest level since Aug. 17.
Higher U.S. yields can support the dollar because they offer investors higher potential returns on dollar-denominated assets. The dollar’s status as a traditional safe-haven currency can add support during periods of geopolitical uncertainty.
But a stronger dollar can create difficulties for emerging markets, particularly countries that rely on imported energy or carry significant dollar-denominated debt. Higher oil prices and a stronger dollar can squeeze national budgets, widen trade deficits and make debt service more expensive.
India illustrates the sensitivity. Reuters reported that Indian markets were expected to fall after Brent crude rose as high as $96.60, with investors concerned that higher oil prices and the prospect of higher U.S. rates would reduce the appeal of emerging-market assets.
Gold, another traditional safe-haven asset, was down 0.1% at $4,322.24 an ounce. Bitcoin fell 0.6% to $76,951, while ether declined 1% to $2,394.57.
The mixed response among alternative assets underscored that investors were focusing less on a simple flight to safety and more on the direct effects of rising real and nominal yields.
Diesel adds to the pressure
The oil rally has been especially sharp in diesel markets.
U.S. diesel futures reached a 52-month high Tuesday after increasing about 51% over the previous 10 weeks. The diesel crack spread, a measure of refining profitability, reached a record of around $107 a barrel, according to LSEG data cited by Reuters.
Diesel is a critical input for transportation, agriculture, shipping, construction and industry. Unlike crude oil, which can move markets through expectations, diesel prices often affect the day-to-day costs of moving goods and operating equipment.
If the increase persists, it could feed into freight costs, food prices and inflation measures more directly.
The spike has been linked not only to the Middle East but also to refinery disruptions in other regions, including Russia. That broadens the supply concern beyond one conflict zone.
For businesses, the risk is that higher energy costs could narrow profit margins just as higher interest rates raise financing costs. For consumers, it could mean more expensive fuel, transportation and goods.
What investors are watching
Markets now face several overlapping risks:
- Whether U.S.-Iran fighting expands or disrupts shipping further through the Strait of Hormuz.
- Whether Brent crude breaks decisively above $95 or returns toward lower levels.
- Whether Treasury yields move toward 5%, potentially placing greater pressure on equities and borrowing costs.
- Whether U.S. jobs data supports or weakens the case for a September Federal Reserve rate increase.
- Whether governments can manage rising borrowing costs without further undermining confidence in sovereign debt markets.
The immediate market reaction has been negative: stocks lower, oil higher and bonds weaker.
But the next phase will depend on whether the conflict remains contained and whether central banks see the energy shock as temporary or as a threat to their inflation goals.
For now, investors are treating the U.S.-Iran escalation not simply as a geopolitical event but as a financial one. The Strait of Hormuz has become a pressure point for global supply, inflation expectations and asset prices, linking military developments in the Middle East to mortgage rates in the United States, bond yields in Japan and stock-market losses around the world.
