Global bond markets hit by sell-off wave as US, Japan, UK, Germany yields surge

Global bond markets are in turmoil after international oil prices soared following a resumption of armed conflict between the United States and Iran. Long-term government bond yields in the US, Japan, the United Kingdom and Germany all surged to their highest levels in years or decades. A sell-off is spreading across global bond markets, driven by fears of renewed Middle East-driven inflation compounded by fiscal expansion and rising government bond issuance in major economies.

On Tuesday (local time), the yield on the benchmark 10-year US Treasury note rose 3 basis points (1 basis point = 0.01 percentage point) to 4.788%, its highest level since Jan. 14, 2025.

The 30-year Treasury yield, which serves as a benchmark for mortgage rates and other long-term borrowing costs, climbed to 5.272%, approaching its highest level since 2007.

The shock was not confined to the US. Japan's 10-year government bond yield surged to 3% during trading, its highest since October 1996 — a level not seen in roughly 30 years. Concerns over large-scale fiscal spending by the Japanese government and the possibility of further benchmark interest rate hikes by the Bank of Japan both weighed on bond prices simultaneously.

The rise in long-term yields was even more pronounced in the UK. The 30-year gilt yield jumped to 5.919% during trading, its highest since 1998, while the 10-year yield climbed to 5.224%, its highest since 2008.

Germany's 10-year government bond yield also rose to 3.339% during trading, its highest since 2011. Because bond prices and yields move in opposite directions, the synchronized surge in yields across major economies signals a broad-based sell-off in global bond markets.

The immediate trigger for the global yield spike is widely identified as the rise in oil prices. Fears of supply disruptions grew after the US and Iran exchanged direct strikes again and an oil tanker was hit in the Strait of Hormuz.

Brent crude and West Texas Intermediate both climbed more than 2% during trading before extending their gains. WTI ultimately settled at $90.22 per barrel, up 5.20% from the previous session, crossing the $90 threshold, while Brent closed up 4.60% at $94.65.

The renewed oil price surge is feeding into bond markets through concerns that inflation — which had been cooling — could accelerate again, potentially delaying interest rate cuts by central banks around the world.

Fiscal expansion in major economies and the resulting increase in government bond issuance are also pushing long-term yields higher. When governments ramp up spending by expanding bond supply, investors demand higher returns, driving bond prices down and yields up.

The AI investment boom is adding another layer of pressure on bond markets. Companies are issuing growing volumes of corporate bonds to fund large-scale data centers and AI infrastructure, putting governments and corporations in simultaneous competition for capital in the bond market.

The shock in global bond markets has spilled over into equities. Rising government bond yields increase borrowing costs for businesses and households while also lifting the discount rate applied to future corporate cash flows, weighing on stock market valuations.

Wall Street also fell on Tuesday. The Dow Jones Industrial Average, the S&P 500 and NASDAQ all declined, as the oil price shock originating in the Middle East spread across global financial markets, hitting both bonds and equities.

Andrew Lilley, chief rates strategist at Barrenjoey, said a significant portion of the recent bond sell-off reflects markets repricing the Federal Reserve's monetary policy path. He forecast the Fed would raise interest rates at least three times starting in September.

Ulrike Hoffmann-Burchardi, chief investment officer for UBS Americas, said inflation concerns remain elevated as the prospect of normal navigation resuming through the Strait of Hormuz remains uncertain, and forecast that bond yield volatility is likely to persist in the near term.