US-Iran truce expires: Oil rises, bond yields climb as markets turn cautious

Oil prices rose and government bond yields climbed on Tuesday as the expiry of a fragile US-Iran truce revived concerns over energy supplies and weighed on investor sentiment.

The temporary ceasefire expired after diplomatic efforts between Washington and Tehran failed to produce a breakthrough. Iran said it would shift to a “fully offensive” military posture if diplomacy failed, raising fears of renewed conflict and further disruption to shipping through the Strait of Hormuz.

The market reaction was relatively contained in equities, but the rise in crude prices and bond yields highlighted the risks facing investors as geopolitical tensions remain elevated.

Oil rises as Hormuz risks return

Brent crude futures rose 0.2 per cent to $91.06 a barrel in Asian trading on Tuesday, after gaining more than $2 on Monday.

US West Texas Intermediate crude also rose, with prices reaching their highest level since late July. The gains came as the lack of progress in US-Iran talks refocused investors on the risk of disruptions to global oil supplies.

The Strait of Hormuz remains at the centre of market concerns. The waterway is a crucial route for global energy shipments, and shipping activity has slowed sharply amid the conflict.

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Reuters reported that only five tankers passed through the strait on Saturday and none on Sunday, compared with 31 during the previous weekend. Any prolonged disruption could tighten global oil supplies and push prices higher.

The renewed oil rally also complicates the inflation outlook. Higher energy prices can feed into transportation, manufacturing and household costs, potentially limiting the room available to central banks to cut interest rates.

Asian stocks remain mixed

Asian markets were relatively resilient despite the geopolitical risks.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.8 per cent, supported by a more than 3 per cent jump in South Korea’s KOSPI as the market reopened after a holiday.

Japan’s Nikkei 225 fell 0.3 per cent, while S&P 500 futures were largely flat.

The muted response from equities suggests investors are not yet pricing in a major escalation in the conflict. However, higher oil prices and borrowing costs are creating a more challenging backdrop for stocks.

Wall Street had already turned lower on Monday. The S&P 500 slipped 0.5 per cent, while the Nasdaq Composite declined 0.3 per cent as investors reacted to weaker US economic data, including an unexpected fall in retail sales.

US bond yields climb

The bigger concern for markets was the rise in long-term bond yields.

The yield on the benchmark US 10-year Treasury rose 0.8 basis point to 4.728 per cent. The 30-year Treasury yield climbed 0.6 basis point to 5.3146 per cent, its highest level in more than two decades.

Higher yields increase borrowing costs across the economy and can put pressure on equity valuations, particularly high-growth technology companies.

Japan’s bond market was also under pressure. The 10-year Japanese government bond yield rose 2.5 basis points to 2.945 per cent, its highest level in three decades.

Markets await next move

For now, investors are watching three developments closely: whether Washington and Tehran can revive diplomacy, whether shipping through the Strait of Hormuz can normalise and how long oil prices remain elevated.

A prolonged standoff could keep crude prices and inflation expectations high, while elevated bond yields could further tighten financial conditions.

The combination leaves global markets vulnerable to fresh volatility, even as Asian equities have so far avoided a sharp sell-off.

(With inputs from agencies.)