Oil prices rise and bonds wobble as Iran war stokes inflation fears

Oil prices rose and global bonds wobbled on Monday as fresh tensions in the Middle East fueled inflation fears and bets that central banks will have to increase interest rates.

Brent crude, the international benchmark for oil, rose Monday after an attack on a nuclear power plant in the United Arab Emirates.

The price surge came as peace talks between the United States and Iran stalled in the sixth week of a ceasefire. President Donald Trump wrote on social media: “For Iran, the Clock is Ticking, and they better get moving, FAST, or there won’t be anything left of them. TIME IS OF THE ESSENCE!”

Brent crude rose as much as 1.77% to $111.16 a barrel in early trading, its highest level in nearly two weeks. However, it eased back to $110 a barrel after Iran said it had responded to a new U.S. proposal aimed at ending the war.

Iran’s foreign ministry spokesperson, Esmaeil Baqaei, said exchanges were “continuing through the Pakistani mediator,” without providing details.

Global bonds were choppy, with the benchmark 10-year U.S. Treasury yield hitting 4.631%, its highest level since February 2025, before paring back to 4.599%.

In the UK, the 10-year gilt yield hit as high as 5.19%, surpassing the 18-year high it reached on Friday, before falling back to 5.15%.

Volatility in UK government bonds was also driven by political instability as traders anticipate that Prime Minister Keir Starmer could face a leadership challenge from Manchester Mayor Andy Burnham later this year.

The swings in the bond market came as UK Chancellor Rachel Reeves and other G7 finance ministers gathered in Paris on Monday to discuss the economic impact of the conflict in the Middle East.

Mohit Kumar, chief economist at broker Jefferies, said bond investors were worried about a “shift to the left” in the UK.

“UK fiscal picture has already been in a poor shape as the government was unable to deliver on spending cuts,” he said. “A shift to the left would imply a further increase in public spending, even though the government does not have the fiscal room to do so. Tax rises have already reached a stage where further rises in taxes are likely to prove unproductive and unlikely to generate additional revenue.”

However, Burnham tried to calm investor concerns over the weekend that he might push up spending. “I support the fiscal rules, there needs to be a plan to get debt down,” he told ITV.

Kathleen Brooks, research director at broker XTB, suggested that UK bond yields could stage a recovery this week.

“If bond markets think they have tamed Burnham from his high-spending ways, then we could see UK yields attempt a retreat on Monday,” she said.

“The key test for UK markets will be whether the 10-year yield can fall below the 5% level, and if the 30-year yield is trusting enough of Burnham to back away from 1998-level highs.”

In Japan, bond yields rose, with the 10-year yield hitting an almost 30-year high of 2.8% on Monday, as the government prepared to issue fresh debt as part of a plan to cushion the economic blow from war in the Middle East.

Stock markets opened lower in Europe on Monday, with the Stoxx Europe 600, which tracks the biggest companies listed on the continent, dropping 0.7%. The UK’s blue-chip FTSE 100 index was broadly flat.

In Asia, Japan’s Nikkei dropped about 1%. Hong Kong’s Hang Seng index fell 1%, while Shanghai’s SSE Composite slipped 0.1%. South Korea’s Kospi closed 0.3% higher.