ABE Weekly: Global Bond Yields Surge as Oil Reignites Inflation Fears

Market Insights

• Bigger Australian Wheat Crop – Good News for our Farmers
• Tokyo CPI Reinforces the Case for Another BOJ Move
• Global Bond Yields Surge as Oil Reignites Inflation Fears

Bigger Australian Wheat Crop – Good News for our Farmers

Key Points

• Australia: The RBA left the cash rate unchanged at 4.35% p.a. at its August meeting. July CPI eased to 3.5% p.a., while Trimmed Mean was unchanged at 3.6% p.a.
• United States: The Federal Reserve left the federal funds rate unchanged at 3.50%–3.75% p.a. at its July 2026 meeting. The latest U.S. CPI inflation rate eased to 3.4% p.a. in July 2026. Core CPI moderated further to 2.5% p.a.
• United Kingdom: The Bank of England held the Bank Rate steady at 3.75% p.a. at its July 2026 meeting. Headline CPI rose to 2.9% p.a. in July, while Core CPI remained unchanged at 2.6% p.a.
• Eurozone: The European Central Bank left its key deposit facility rate unchanged at 2.25% p.a. at its July 2026 meeting. Euro area annual inflation is estimated at 3.3% p.a. in August, up from 2.9% in July.

Bigger Australian Wheat Crop – Good News for our Farmers

Australia’s improved wheat outlook provides an interesting signal for inflation and growth outlook. ABARES has lifted its 2026–27 wheat production forecast to 29.9 million tonnes, 12% above its June estimate, following better-than-expected winter rainfall across key southern growing regions. While production remains below last season’s 36 million tonnes (which was exceptionally large by historical standards), the upgrade suggests that earlier concerns around dry conditions have eased and that yields could be stronger than initially anticipated.

Tokyo CPI Reinforces the Case for Another BOJ Move

Japan’s latest inflation data continue to strengthen the case for further policy normalisation by the Bank of Japan. Tokyo’s core CPI accelerated for a third consecutive month to 1.8% year on year in August, while the measure excluding fresh food and fuel rose 2.0%. More importantly from a policy perspective, the underlying drivers appear increasingly broad-based, with rents, restaurant prices and medical fees all rising, while persistent wage pressures are feeding through into services inflation. The resilience of price growth is notable given the government’s measures to contain household energy costs, which pushed overall energy prices down 2.0% in August.

The labour market also remains tight, with unemployment falling to 2.4% and the job-to-applicant ratio holding at 1.18. This combination of firm wage growth, constrained labour supply and continued cost pass-through suggests that inflationary pressures are becoming more entrenched rather than being driven solely by temporary food or energy effects. The sharp reversal in rice prices provides some offset, but the broader inflation picture remains sufficiently firm to keep the BOJ focused on upside risks.

Against this backdrop, markets are increasingly looking for a September rate increase. Deputy Governor Himino’s recent comments, together with the latest Tokyo inflation data, leave little reason for investors to materially reduce expectations in the near term.

Global Bond Yields Surge as Oil Reignites Inflation Fears

The global bond market has come under renewed pressure, with long-term government bond yields rising to their highest levels in years as investors reassess the outlook for inflation, monetary policy and government borrowing. A renewed rise in oil prices has added another layer of concern, with Brent crude moving back above US$90 a barrel following the latest escalation between the US and Iran and the renewed threat to shipping through the Strait of Hormuz.

The sell-off has been broad-based. The US 10-year Treasury yield has risen to around 4.8%, while Japan’s 10-year government bond yield has moved above 3% for the first time since 1996. In the UK, the 10-year gilt yield has climbed above 5.2%, its highest level since 2008.

The rise in oil prices is particularly important because it complicates the inflation outlook. Higher energy costs feed directly into headline inflation, but they can also squeeze household purchasing power and raise input costs for businesses. At the same time, higher bond yields are already tightening financial conditions by increasing mortgage, corporate borrowing and government funding costs. The result is an unusual combination of an inflationary supply shock occurring alongside increasingly restrictive financial conditions.

For the Federal Reserve, this means the bond market has already done a significant amount of the tightening work. The sharp increase in long-term yields over recent weeks has lifted borrowing costs across the economy without the Fed necessarily needing to move policy rates by the same magnitude. Markets are now placing considerably greater odds on another rate increase, although the rise in longer-dated yields also raises the possibility that the bond market has moved ahead of the Fed.

This is why we continue to believe there is merit in gradually extending duration and locking in attractive yields across 3–5 year fixed income securities. Rather than attempting to identify the exact peak in interest rates, investors can take advantage of elevated yields today and secure them for longer.