Stock Futures, Bond Yields Drop on Fear of War in Ukraine

Overseas stock markets also dropped, catching up with Wall Street’s late-week tumble. The Stoxx Europe 600 lost 3.4%, led lower by shares of banks and travel and leisure companies. Japan’s Nikkei 225 fell 2.2% and China’s Shanghai Composite Index fell 1%.

Oil prices edged down, after jumping in early trading on concern a war would curtail supplies of Russian crude to global markets that lack significant spare supplies. Brent, the benchmark in energy markets, fell 0.3% to $94.07 a barrel, holding near its highest level since 2014.

Prices for natural gas—of which Russia is the single biggest exporter globally—rose on both sides of the Atlantic. In the U.S., gas prices rose 4.5% to $4.12 per million British thermal units. Prices in Europe, which depends on Russia for much of its gas, a chunk of it flowing through Ukraine, jumped 8.8%.

Investors reached for assets they perceive to be havens at times of uncertainty. The yield on benchmark 10-year Treasury notes fell to 1.924% from 1.951% Friday, having reached a two-year high of 2.028% Thursday. Yields and bond prices move in the opposite direction. Gold futures rose 0.8% to $1,857.40 a troy ounce. 

Stocks have been buffeted this year by the prospect of an increase in interest rates by the Federal Reserve. The central bank is gearing up to raise borrowing costs to combat the highest rate of inflation in four decades, winding down the easy-money policies that have pushed riskier assets higher for much of the past two years.

The possibility of a ground war in Europe has loomed large as an additional source of uncertainty for investors. Moscow has denied intending to invade Ukraine, but Russia’s military buildup has quickened, with forces positioned on three sides of the country. They include some of Russia’s best-trained battalions and missiles that could strike targets throughout Ukraine.

The U.S. and its allies are withdrawing diplomatic staff from Kyiv in a sign Western capitals see diplomatic options narrowing. Companies are also taking precautions. Dutch airline KLM has stopped flying in Ukrainian airspace. Shares of

Air France KLM,

the Paris-listed holding company, dropped 5%.

In recent weeks, investors had wagered that war would be averted, piling into the ruble and hryvnia currencies as well as Russian and Ukrainian government bonds. On Monday, those trades started to reverse.

Russia’s benchmark stock index, the Moex Russia, fell 3.1%. Ukraine’s hryvnia weakened 1.7% to trade at 28.55 a dollar. The yield on a dollar-denominated Russian government bond maturing in 2026 rose to 4.574% from 3.919% Friday, according to Tradeweb. A Ukrainian government bond maturing in 2033 traded at a yield of 11.286%, up from 10.222%.

Catching some investors off guard, the ruble strengthened 0.7% to trade at 76.93 a dollar. Timothy Ash, a strategist at BlueBay Asset Management, said the move suggested Russia’s central bank had intervened in foreign-exchange markets. “On the geopolitical risk, the ruble should be weaker,” he added.

Russia’s central bank has ample reserves of foreign currency with which to support the ruble. The bank didn’t immediately respond to a request for comment.

Investors say the standoff over Ukraine is difficult to trade because they have no particular insight into the possibility of an invasion and the nature and severity of the West’s response. If Moscow were to attack and the U.S. and its allies responded with sanctions, the hostilities could affect the world economy and markets in unpredictable ways. 

One likely consequence, given Russia’s position as a commodities superpower, would be higher energy prices, which could keep up the pressure on central banks to raise interest rates. At least in the short term, stocks and bond yields would likely decline as investors sought safe assets, investors say.

“We have the inflation story and then we have the Russian story,” said Lars Skovgaard Andersen, senior investment strategist at Danske Bank Wealth Management. In the event of an invasion, “there will be some negative effect on markets, but I also think investors are incorporating this,” he added.

Airline stocks were hammered in Europe after reports that several were avoiding Ukraine’s airspace. Budget carrier Wizz Air dropped 9.2%, British Airways owner International Consolidated Airlines Group lost 6.1% and Deutsche Lufthansa fell 4.7%.

Among individual U.S. stocks, Splunk rose 8.2% in premarket trading after The Wall Street Journal reported that

Cisco Systems

had made a takeover offer worth more than $20 billion for the software maker. Blackstone slipped 2.6% ahead of the bell after the private-equity company agreed to buy Australian casino operator Crown Resorts for $6.3 billion.

London-listed energy company BP, which owns almost 20% of Russia’s state-backed Rosneft Oil and invests in several joint ventures in Russia, fell 2.3%.

—Anna Hirtenstein contributed to this article.

Write to Joe Wallace at joe.wallace@wsj.com