GLOBAL MARKETS: Global bonds buckle as oil prices raise inflation risks

SYDNEY - Global bond yields spiked to new highs and sharemarkets slumped on Friday as soaring oil prices inflamed inflation risks, sending investors scrambling to price in more policy tightening from central banks across the globe.

Brent crude LCOc1 climbed to a four-month high of $109.97 a barrel on Friday after a 6% overnight jump, capping a weekly gain of nearly 13%. Oil flows remained restricted through the Strait of Hormuz as the U.S. and Iran traded attacks, while Iran-aligned Houthis seized control of Yemen's port of Mocha, threatening Saudi oil exports in the Red Sea.

"Maritime traffic through the Bab el-Mandeb is gravely imperiled by the Houthi advances," said Helima Croft, head of global commodity strategy at RBC Capital Markets, tipping Brent could hit $121.99 a barrel later this year due to the resumption of a full-blown Saudi-Houthi war.

That was a wake-up call for markets that are finally starting to price in the risk of a protracted war. Comments from President Donald Trump that the war could last beyond the November midterm elections haven't helped, with bond yields surging globally on heightened inflation fears.

The benchmark 10-year Treasury yield US10YT=RR climbed 2 basis points on Friday to 4.9708%, its highest in three years and just shy of the closely watched 5% level, raising financial costs for the $40 trillion U.S. government debt. The 30-year yields US30YT=RR scaled another 19-year top of 5.3803%, lifting U.S. mortgage rates and hamstringing the housing market.

Two-year yields US2YT=RR rose another 2 basis points to 4.5835% after surging 12 bps overnight as markets ramped up bets that the U.S. Federal Reserve will have to raise interest rates this month to tame inflation, currently priced at about 70% probability.

The rout in the U.S. bond market was partly due to a Treasury buyback programme that fell short of the expected $6 billion value.

Asian bonds extended the global selloff, with Australia's three-year government bond yields AU3YT=RR surging 18 bps to a 15-year high of 5.047%. Japan's 10-year government bond yieldsJP10YTN=JBTC rose 6 bps to 2.97% as data showed Japan's wholesale inflation stayed elevated to bolster the case for an imminent rate hike from the Bank of Japan.

RATE HIKES COMING

Analysts at JPMorgan now expect eight of the nine developed-market central banks to hike interest rates by the year end, including the Fed, BOJ, all four central banks in Europe, and the reserve banks of Australia and New Zealand.

"The tightening is for now expected to remain shallow, but risks to our forecasts lean in the direction of more action in the face of resilient growth, sticky core inflation, and commodity price pressures," they said in a note.

The European Central Bank raised interest rates overnight for a second time this year and some officials see more tightening ahead with October in play.

The surge in oil prices has raised the stakes for U.S. consumer prices data for August due later in the day, which could make or break the case for a Fed rate hike next week. Forecasts are centred on a 0.2% monthly rise in the core measure of CPI, although risks are skewed towards a higher number as the PPI data overnight showed some stickiness.

Higher bond yields raised the discount rates used for corporate valuations, leaving Asian stocks in deep losses. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS lost 1.8% while Japan's Nikkei .N225 tumbled 2.8%.

Chinese blue-chips .CSI300 fell 1.2% and Hong Kong's Hang Seng .HSI dropped 1.5%.

Nasdaq futures NQc1 fell 0.2% and S&P 500 futures ESc1 were little changed.

The U.S. dollar lifted with higher Treasury yields, having gained 0.4% overnight against its major peers. It =USD was last steady on Friday at 99.04.

In commodity markets, gold rose 0.3% to $4,328 an ounce XAU= after dropping nearly 2% overnight, failing to catch some of the safe-haven bids. GOL/

-Reporting by Stella Qiu; Editing by Stephen Coates/Reuters