Asia Stocks and Bonds Extend Losses as Oil Climbs Amid Iran Tensions

Global Markets Plunge as Iran War Tensions Escalate

Stocks continued their downward trajectory from record highs as a prolonged stalemate over the Iran war led to a sharp increase in oil prices and further exacerbated the selloff in global bonds.

Asian shares experienced a decline of up to 1.1% before recovering, with South Korean stocks nearing a correction. Futures on the S&P 500 Index fell by 0.5%, following a decline of over 1% on Friday, as inflation concerns drove bond yields significantly higher. The dollar maintained its gains, having recorded its best week since early March, as investors sought safe-haven assets amidst the Middle East conflict.

The sentiment was further dampened by the rise in Brent crude, which increased by 1.2% to around $110.60 a barrel, following a gain of almost 8% last week. The lack of progress in efforts to reopen the vital Strait of Hormuz was a major contributor to the surge in oil prices. President Donald Trump warned that the "clock is ticking" for Iran to strike a deal.

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US government bonds, which experienced their worst week in a year, continued their decline, leading to a rise in the 10-year Treasury yield by one basis point to 4.60%. Elevated oil prices fueled inflation and weakened the outlook for economic growth, pushing yields on the 30-year to near a two-decade high. Japan's 10- and 20-year rates rose by about 10 basis points to their highest levels since 1996, while bonds fell in Australia and New Zealand.

The moves followed a selloff in stocks and bonds on Friday, as fears grew that the effective closure of the Strait of Hormuz would keep oil prices elevated, fuel inflation, and force central banks to maintain higher interest rates. For months, investors had largely brushed aside those risks as equities surged on bets that billions of dollars spent on the AI rollout would drive corporate earnings growth.

Washington's failure to offer "tangible concessions" while seeking concessions from Iran led to an impasse in negotiations. A drone attack sparked a fire at a United Arab Emirates nuclear plant, highlighting the risks to the fragile ceasefire.

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High oil prices risk ushering a new era of elevated borrowing costs as war-driven inflation angst intensifies in global bond markets. Japan's 30-year yield climbed to 4% for the first time since 1999 last week, while US 30-year Treasury yields moved toward a two-decade high above 5%.

Finance ministers of the Group-of-Seven are set to discuss the debt selloff when they meet this week, although it remains unclear how they can ease pressure. The core issue remains the transit of oil through the Strait of Hormuz, a vital artery for the flow of oil and gas from the Middle East.

"The Strait of Hormuz blockade will remain the dominant market driver because there is no clear endgame in sight while the buffer from global oil inventories is shrinking fast," said Elias Haddad, global head of markets strategy at Brown Brothers Harriman. "As a result, crude oil prices are vulnerable to more upside, weighing on both global bond and equity markets."

The pound weakened in early trading after Wes Streeting announced his intention to participate in any leadership contest to replace Keir Starmer and called for Britain to rejoin the European Union. The declaration follows Manchester Mayor Andy Burnham's announcement that he intends to run for parliament, opening a pathway to challenge Starmer, which caused a rout in gilts last week due to fears of possible expansionary fiscal policy.

In a separate development, Beijing agreed to purchase at least $17 billion of agricultural products from the US annually through 2028, as announced by the White House in a fact sheet detailing the meeting with President Trump.

Attention will be focused on the bond market, with a shift in wagers around the Federal Reserve. Traders now see an interest-rate hike as a certainty by March, underscoring how the Iran war has flipped the bond-market narrative on its head since late February, when two quarter-point cuts were expected for 2026.

"The key, investors say, is that the pressure on bonds will persist as long as the standoff in the Middle East staunches the flow of oil through the vital Strait of Hormuz," said Scott Ladner, chief investment officer at Horizon Investments. "Ultimately, the Iran war will find a conclusion and commodity prices will come back down towards pre-war levels. But with earnings season in the US coming towards its close, investors are focusing again on the macro picture, and that picture is being painted with higher interest rates, always a headwind for equity markets."