Global stocks dip as bond yields climb to fresh multi-year highs

Global stocks edged lower on Tuesday, extending the previous session’s selloff, while a surge in bond yields and rising oil prices stirred fresh anxiety among investors worldwide.

U.S. Treasury yields touched their highest level since 2007, driven by growing expectations of further Federal Reserve rate hikes, a heavy pipeline of government debt issuance, resilient economic growth, and lingering worries over the country’s long term fiscal health. That climb has been building for a month and now dominates trading sentiment across asset classes.

Investors turned their attention to the Fed, where traders widely expect a quarter point rate increase and signals that more tightening could follow. Fed Chair Kevin Warsh has offered little guidance on the likely path ahead, leaving markets to price in their own expectations.

MSCI’s broad world stocks index dropped 0.18 percent on Tuesday, adding to Monday’s 0.65 percent decline. In Europe, the STOXX 600 slipped 0.10 percent and briefly touched 629.41, its weakest level since June 12. The region’s technology stocks bucked the trend, gaining 0.10 percent after losing more than 2 percent a day earlier. In the United States, Nasdaq futures fell 0.10 percent and S&P 500 futures lost 0.15 percent.

Jeff Blazek, co chief investment officer of multi asset strategies at Neuberger, described the market’s pullback as orderly rather than alarming. He said volatility has clustered around specific events instead of signaling a broad collapse in confidence, and noted that cheaper valuations point to a bull market that still carries solid momentum even as stocks look more attractively priced.

Oil markets added to the unease. Brent crude climbed above $105 a barrel after Yemen’s Houthi forces, who align with Iran, launched a new round of attacks on Saudi Arabia and reinforced positions along Yemen’s Red Sea coast. Thierry Wizman, global forex and rates strategist at Macquarie Group, said Iran’s shift toward a preemptive military posture now gives crude a genuine reason to keep rising, something that was not as clear a few weeks ago. He added that the U.S. administration may ultimately have little choice but to return to active military engagement once the midterm elections pass.

Central banks remained the market’s central preoccupation. The benchmark U.S. 10 year Treasury yield reached levels unseen since 2007 as traders bet on a string of Fed increases. In Europe, German Bund yields, the euro zone’s key benchmark, rose to a 17 year high of 3.56 percent, with markets now pricing the European Central Bank’s deposit rate at 3.45 percent by the end of 2027, up from the current 2.50 percent.

John Velis, head of Americas strategy at BNY, said markets are now pricing in nearly four separate Fed rate hikes through the end of next year. He cautioned that the economy is unlikely to tolerate rates at that level for long, predicting the central bank will begin easing its restrictive stance later in the year.

The more hawkish outlook for Fed policy lifted the dollar, though some strategists warned that climbing yields are also fueling fears of a sharper correction in riskier assets, pushing investors toward the safety of the U.S. currency. The dollar index rose 0.12 percent to 99.58, building on Monday’s 0.39 percent gain. The euro slipped 0.05 percent to $1.1542, while the dollar advanced 0.40 percent against the yen to trade at 154.79.

Attention is also turning to Japan, where the central bank is widely expected to raise its policy rate by 25 basis points to 1.25 percent when its two day meeting concludes on Friday, alongside signals of further tightening ahead. Policymakers are trying to support the yen after a period of intervention pulled the currency back from a 40 year low.

Gold posted modest gains, with spot prices trading at $4,283 an ounce, as some investors sought a hedge against the broader uncertainty gripping bond and equity markets.

The current bout of market strain echoes past tightening cycles, when rising borrowing costs forced a repricing of both government debt and corporate valuations. Yields at levels not seen since before the 2008 financial crisis carry particular weight for investors, since they raise the cost of capital across the global economy and often force a reassessment of growth assumptions built into stock prices. Combined with an oil market rattled by conflict in the Middle East, the current environment suggests markets could remain volatile as central banks in Washington, Frankfurt and Tokyo all move toward tighter policy at the same time.