Bonds, stocks selloff pauses as oil retreats from multi-month high

By Samuel Indyk and Stella Qiu

LONDON, Sept 11 (Reuters) - A selloff in global bond and equity markets took a breather on Friday as oil prices retreated from a four-month high, though the recent surge in energy costs continued to fuel inflation worries and expectations that central banks may need to tighten policy.

Brent crude hit a four-month high of $109.97 a barrel on Friday after a 6% jump the day before, but it soon ran into selling pressure and was last down almost 2% at $105.90. It was still set for a weekly rise of about 10%. 

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.

That was a wake-up call for markets that are 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. 

"Markets are pricing in a scenario of higher rates for longer," said Gustav Helgesson, macro strategist at SEB. 

The benchmark 10-year Treasury yield was little changed on Friday at 4.946%, after earlier touching its highest in almost three years at 4.979%, as bonds were helped by retreating oil prices.

The 30-year yield scaled another 19-year top of 5.3836% before falling back to 5.359%. Bond yields move inversely with prices.  

The 2-year yield hit a new 14-month peak of 4.5961% after surging 12 bps on Thursday 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 67% probability. 

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

In Europe, the 10-year German Bund yield was up 1 bp for the day and up 17 bps for the week, its biggest weekly rise since March.  

EYES ON CPI

The recent surge in oil prices has raised the stakes for August U.S. consumer price data 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.

"Ahead of every payrolls print, every CPI print, it feel like it's the most important print yet, but it definitely feels like this one is," said SEB's Helgesson.

"If we see a big divergence from expectations, we'll see very big market swings as well."

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 on Thursday for the second time this year and some officials see more tightening ahead with October in play. 

European equity indexes took comfort from a dip in oil and gas prices although they were still set for sharp weekly falls. The pan-regional STOXX 600 was up 0.2% on Friday but down 2% this week. Nasdaq futures were up 0.3% and S&P 500 futures bounced 0.4%.

Asian stocks finished with sharp losses. MSCI's broadest index of Asia-Pacific shares outside Japan lost 1.5% while Japan's Nikkei tumbled 1.9%. 

The U.S. dollar lifted with higher Treasury yields, having gained 0.4% on Thursday against its major peers. It was steady on Friday at 99.04. [FRX/]

Gold rose 0.6% to $4,342 an ounce after dropping nearly 2% on Thursday.

(Reporting by Samuel Indyk and Stella Qiu; Editing by Stephen Coates, Elaine Hardcastle)