Global Bond Selloff Deepens as Inflation Fears and War Risks Push Yields Higher

Bond markets around the world extended losses on Monday, with rising oil prices and ongoing tensions in the Middle East increasing fears of persistent inflation and higher interest rates.

From Tokyo to New York, government bond yields climbed sharply as investors began pricing in the possibility that central banks may keep borrowing costs elevated for longer — or even resume rate hikes.

U.S. Treasury Yields Hit Multi-Month Highs

Benchmark U.S. Treasury yields surged as bond prices fell.

The yield on the 10-year U.S. Treasury rose to 4.631%, reaching its highest level since February 2025 after gaining more than 20 basis points last week.

Meanwhile:

• The 2-year Treasury yield climbed to 4.102%, its highest level in 14 months
• The 30-year Treasury yield jumped to 5.159%, marking a one-year high

Higher bond yields strengthened the U.S. dollar and added pressure on stock markets, which had recently rallied due to optimism surrounding artificial intelligence-related investments.

Oil Prices Rise as Middle East Conflict Intensifies

The latest bond selloff was partly driven by a sharp increase in energy prices.

Brent crude oil climbed to $111 per barrel after diplomatic efforts to end the conflict involving Iran appeared to stall following reports of a drone strike at a nuclear facility in the United Arab Emirates.

More than two months into the Middle East conflict, investors are increasingly concerned about the economic consequences, particularly rising inflation and its impact on future monetary policy.

“Higher for Longer” Interest Rates Return to Focus

According to analysts, financial markets are once again considering a prolonged period of elevated interest rates.

Charu Chanana, chief investment strategist at Saxo, said the narrative of rates remaining “higher for longer” is gaining momentum, even if additional rate hikes are not yet the main expectation.

Markets now estimate a greater than 50% probability that the U.S. Federal Reserve could raise interest rates by December in response to inflation pressures.

Expectations have also shifted globally:

• The European Central Bank is increasingly expected to raise rates as early as next month
• The Bank of England is projected to deliver roughly two rate increases this year

Japanese Bond Yields Reach Record Levels

Additional pressure came from Japan after reports suggested the government may issue more debt to fund an extra budget designed to offset economic damage linked to the conflict.

The announcement intensified concerns about already strained public finances.

Japanese government bond yields surged:

• The 30-year Japanese bond yield climbed above 4.2%, reaching a record high
• The 10-year yield rose to 2.8%, its highest level since 1996

Analysts said increased government spending plans have worsened existing bond market anxiety.

Inflation Data Continues to Worry Investors

The recent market turmoil follows stronger-than-expected inflation reports released across several major economies.

Data showed consumer and producer prices accelerated in the United States, while elevated inflation readings were also reported in China, Germany and Japan.

Investors increasingly believe inflationary pressures caused by higher energy costs and supply disruptions are becoming embedded in the global economy.

Trump-Xi Talks Fail to Ease Market Concerns

Markets had also closely monitored last week’s summit between current U.S. President Donald Trump and Chinese President Xi Jinping.

However, hopes that the meeting could lead to coordinated efforts to ease Middle East tensions or stabilise oil markets failed to materialise.

Analysts noted that persistent energy supply risks, stronger inflation and resilient consumer demand create conditions supportive of higher global interest rates.

UK and European Bonds Also Face Pressure

The selloff extended into Europe.

Germany’s bond futures and French government debt declined, while UK gilt yields climbed to their highest levels in decades.

Political uncertainty in the United Kingdom, including mounting pressure on Prime Minister Keir Starmer following significant local election losses, has added further pressure to British bond markets.

Outlook: Global Markets Brace for Persistent Inflation

The sharp rise in bond yields suggests investors increasingly expect inflation to remain elevated for longer than previously anticipated.

With energy prices rising, geopolitical tensions persisting and central banks reconsidering monetary policy paths, volatility across global bond markets could remain elevated in the months ahead.