By Johann M Cherian and Tom Westbrook
Sept 29 (Reuters) - Oil prices rose and bond yields were pinned at multi-year highs on Tuesday, leaving equities in a tricky spot, as investors braced for an era where short-term borrowing costs settle at their highest levels in years.
The seven-month-old conflict in the Middle East has been a key reason for investors repricing inflation and interest rate expectations, while soaring government debt competing with strong bond issuance by global AI companies has also
driven yields higher.
September is set to mark one of the heaviest bond selloffs in heavily indebted European economies and the US.
Yields on French 10-year bonds were pinned at their 2008 high of 4.7619% and were set for their biggest monthly rise since 2022, while those on US 10-year notes were hovering near their 19-year high of 5.27% and were on track for their biggest monthly jump since 2024.
Sovereign yields are an anchor for global markets, a reference price for investing in riskier stocks and a benchmark for mortgages and corporate borrowing. Higher rates pile pressure on government, corporate and household budgets.
"Investors continue to expect that such restrictive financial conditions will eventually take their toll, but employment, consumer spending, and capital expenditures related to artificial intelligence remain solid," John Plassard, head of investment strategy at Switzerland-based Cité Gestion, said.
"The real question, therefore, is not whether 5% is comfortable, but whether the US economy has become less sensitive to interest rates than it was before. If this resilience persists, the Fed will be able to keep rates high for longer without immediately triggering a recession."
AI was in the spotlight after Reuters reported that Anthropic's upcoming public debut could value the company at more than $2 trillion, and that it was planning to spend $518 billion on cloud, computing and infrastructure.
Tech stocks helped Europe's STOXX 600 rise 0.3%, while Nasdaq and S&P 500 futures on Wall Street were steady after a weak Monday.
MSCI's global equities index was at a more than one-week low, while Brent crude futures rose 1% to $106 a barrel, even as US and Iranian officials made renewed efforts to end the conflict after President Donald Trump rejected a Tehran-backed proposal last week.
DOLLAR STANDS TALL
Higher US yields and uncertainties over the timeline of the Middle East conflict kept the dollar afloat versus the euro at $1.1347 and the Japanese yen at 157.34 per dollar. The dollar index that measures the US currency against a basket of six other peers was poised for its first monthly gain since June.
US inflation and employment data later this week will be key drivers for the path ahead of Federal Reserve interest rates, with investors seeing a 72% chance for an at least 25-basis-point hike in October, the CME Group's FedWatch Tool showed.
Australia's central bank was the latest to lift rates to a 15-year high, as expected, and market participants have bet on it going higher still. The country's currency gave up some initial gains following the verdict and was last down 0.4% at $0.6987.
Gold prices struggled to recover from a more than seven-week low as higher yields limited the non-yielding asset's rise. It was last at $4,141.79 per ounce.
"Still, we remain constructive on gold and silver, with the former underpinned by reserve diversification and its role as a strategic portfolio diversifier, and the latter supported by structural demand from data centres, AI infrastructure, and electrification," analysts led by Mark Haefele at UBS global wealth management said.
Among cryptocurrencies, bitcoin inched up 0.6% to $84,020.25. It has retreated roughly 4% from the more than seven-month high it hit earlier this month.
(Reporting by Tom Westbrook in Singapore and Johann M Cherian in Bengaluru; Editing by Stephen Coates, Thomas Derpinghaus and Andrew Heavens)
