Global Markets Shaken as Middle East Conflict Drives Oil Past $100 and Bond Yields to Multiyear Highs
Intensifying conflict in the Middle East has pushed West Texas Intermediate crude above US$100 and Brent to US$108, triggering a global sell-off in bonds. With U.S. Treasury yields hitting their highest level since 2007, central banks including the ECB, Fed, and Bank of Canada are signaling further rate hikes to combat rising inflation.
Global financial markets experienced significant volatility this week as escalating tensions in the Middle East drove energy prices sharply higher, fueling widespread inflation concerns. West Texas Intermediate (WTI) crude surged past US$100 per barrel for the first time since May, while Brent crude reached US$108. This represents a more than 40 per cent increase in oil prices since early July, driven by intensified fighting in the region.
The energy shock has had immediate repercussions on borrowing costs worldwide. The yield on 10-year U.S. Treasury bonds climbed to 4.95 per cent, marking its highest level since 2007. Similarly, the yield on comparable Government of Canada bonds hit 3.95 per cent, a level last seen in 2023. Despite attempts by U.S. Treasury Secretary Scott Bessent to lower yields through direct market intervention and purchases of long-term bonds, these efforts did little to halt the upward march in interest rates.
Central banks are responding with hawkish signals. On Thursday, the European Central Bank raised interest rates, with President Christine Lagarde warning that inflation would be longer-lasting than previously anticipated. In North America, financial markets are betting on a one-quarter-point rate hike by the Bank of Canada by the end of the year, potentially occurring as early as October. Meanwhile, following hawkish remarks from new Federal Reserve Chair Kevin Warsh at the Jackson Hole meeting, markets are leaning toward a rate hike from the U.S. Federal Reserve next week.
The geopolitical drivers behind the price spike include U.S.-Iran tanker strikes in the Strait of Hormuz and the capture of a strategic port in Yemen by Houthi forces on Thursday. These developments threaten maritime shipping through the Bab al-Mandab Strait and the Red Sea, raising fears about reduced global oil refining capacity and continued supply disruptions.
Consumers are already feeling the pinch. The national average gas price in Canada rose to $1.78 a litre on Thursday, up from $1.63 a month ago. In the United States, the price of a gallon of diesel hit US$6 for the first time ever. Analysts suggest relief may not come soon; S&P Global Energy does not expect oil prices to return to prewar levels before the end of 2027, predicting they will average between US$80 and US$100 through next year.