Key Takeaways
- Global bond yields spiked to multi-decade highs as a bond selloff deepened.
- Investors have grown increasingly concerned over rising inflation risks amid the latest Middle East flare-up.
- Markets shifted their expectations toward further interest rate hikes this year.
A global bond selloff worsened on Tuesday, with government borrowing costs approaching multi-decade highs in the United Kingdom and Japan as renewed Middle East hostilities exacerbated inflation fears. US 10-year Treasury yields rose 0.03 percentage points to 4.78%, their highest level since January 2025. Japan’s benchmark 10-year bond yield hit 3%, its most elevated since 1996.
UK government bond yields also rose sharply, with markets in catch-up mode after closing for a public holiday on Monday. The 10-year gilt rose sharply above 5.2%, its highest level since the peak of the 2008 global financial crisis. Longer-term 30-year government bonds hit their highest level since 1998 at 5.89%.
“Although domestic factors and the fragility of the British fiscal situation continue to weight on UK yields, the current moves can be attributed more to international factors, and specifically to the US,” says Nicolo Bragazza, associate portfolio manager at Morningstar Wealth.
“As US Treasuries are at the epicentre of global financial markets, they are causing yields to rise across the globe. Countries with more uncertain fiscal paths, such as the UK or France, are those most likely to suffer from an increase in US yields,” he adds.
The spike in borrowing costs comes as the latest flare-up in the US-Iran war has raised concerns that central banks will hike interest rates to combat inflation from higher energy costs. Brent crude oil futures rose 3% on Tuesday to trade at USD 88 per barrel.
Global government debt yields have been marching higher for much of this year, as investors have grown wary over rising costs, ballooning government debt, and increased corporate debt issuance to fund the massive artificial intelligence infrastructure buildout.
European Bond Yields Spike
The bond selloff rippled across Europe on Tuesday, with yields briefly spiking across other major economies following the release of eurozone inflation data. Rising energy prices drove eurozone consumer prices up by 3.3% year over year in August after they rose 2.9% in July, according to Eurostat’s flash estimate.
The European Central Bank is now predicted to raise its key interest rate by 0.25 percentage points next week. “With inflation still accelerating, the ECB is all but certain to hike at next week’s meeting, in line with our expectations,” says Oxford Economics senior economist Leo Barincou.
German government bonds sold off on Tuesday, with the benchmark 10-year Bund yield reaching 3.36% around midday before easing slightly in afternoon trading. The rise was particularly pronounced in two- to five-year maturities, where yields reached their highest levels since 2008, while 30-year Bund yields were little changed. Shorter-dated yields are especially sensitive to monetary policy expectations, with rising energy prices fueling inflation fears and expectations of further interest rate increases.
The yield on the 10-year Italian BTP hit its highest level since November 2023, reaching 4.17% during Tuesday’s trading session. The yield on the 10-year BTP peaked at 4.22% following the release of inflation data for Italy and the eurozone, before retreating to early session levels in the afternoon. The rise in the yield on the 30-year BTP was less pronounced, reaching 4.94%.
In the UK, the latest bond selloff adds pressure on Prime Minister Andy Burnham ahead of his government’s first Budget on Oct. 28. Futures markets have fully priced in a 0.25-percentage-point hike in UK interest rates by the end of the year to combat rising inflation, with the Bank of England’s Nov. 5 meeting seen as the most likely time for it to happen.
In Japan, Prime Minister Sanae Takaichi’s spending plans, including a consumption tax cut, have sparked concerns about the sustainability of its fiscal position, fueling higher bond yields and bets against the yen. Markets are now pricing in the likelihood of a 0.25-percentage-point rate hike at the Bank of Japan’s next meeting on Sept. 18.
Fed Seen More Likely to Raise Rates
New US Federal Reserve chair Kevin Warsh’s debut speech at an economic symposium in Jackson Hole, Wyoming, only added to the latest selloff, as he indicated his commitment to fighting inflation. Investors now forecast a two-thirds chance of a Fed rate hike later this month.
“Warsh’s hawkish tone on core PCE and rate primacy, reinforced by resilient data and the US Treasury’s growing role at the long end of the curve, raises the odds of further tightening ahead,” says UBP group CIO and asset management co-CEO Michaël Lok.
Bank of America analysts say the onus is now on Warsh to deliver a September hike, absent a “material downside surprise.”
