Global bond rout deepens as war driven inflation reshapes rate outlook

Yesterday 13:40

By: Dakir Madiha

Global bond rout deepens as war driven inflation reshapes rate outlook

A sharp global selloff in government bonds intensified Monday as persistent conflict between the United States and Iran pushed oil prices higher and forced investors to reassess expectations for interest rates across major economies. Surging energy costs and accelerating inflation have fueled concerns that central banks may abandon plans for monetary easing and instead return to aggressive tightening policies.

In the United States, the yield on the 10 year Treasury note climbed to 4.61%, its highest level in more than a year. The 30 year Treasury yield remained above 5.1%, levels not seen since May 2025. Bond markets in Europe and Asia also came under pressure. Japan’s 30 year government bond yield rose above 4% for the first time since the security was introduced in 1999, while the 10 year Japanese yield reached 2.8%, its highest level in nearly three decades. Germany’s benchmark 10 year Bund yield climbed to 3.18%, extending its rise toward levels last recorded in 2011.

The selloff has been driven largely by the energy shock that followed the effective closure of the Strait of Hormuz after US and Israeli strikes against Iran on February 28. Brent crude traded near $111 a barrel Monday after a sharp jump late last week as hopes for a negotiated settlement faded. Oil traders increasingly expect supply disruptions to persist as diplomatic tensions worsen and shipping routes in the Gulf remain under pressure.

Higher crude prices are now feeding directly into consumer inflation across major economies. US consumer prices rose 3.8% year on year in April, the strongest annual increase since May 2023. Producer prices climbed 6% from a year earlier, marking the fastest pace since late 2022. Those figures have forced investors to abandon expectations that the Federal Reserve would cut rates later this year.

Interest rate futures tied to the Fed have shifted sharply in recent sessions. Markets now price in at least one rate increase over the next 12 months instead of multiple cuts. Analysts at Yardeni Research warned that any indication the Federal Reserve remains too accommodative could damage confidence in the central bank’s inflation response. The firm expects a 25 basis point increase as early as the Fed’s July meeting.

Pressure is also mounting in Europe. Economists surveyed ahead of the European Central Bank’s June meeting increasingly expect policymakers to raise the deposit rate from 2% to 2.25%. Traders in prediction markets are assigning a high probability to at least one ECB rate increase before the end of the year as inflation risks spread through the eurozone economy.

The market reversal represents a major shift from expectations at the start of 2026, when investors anticipated synchronized monetary easing across advanced economies. In the United States, the 2 year Treasury yield climbed to 4.08%, moving above the current federal funds rate range of 3.50% to 3.75%. Analysts often interpret that move as a signal that monetary policy may be too loose relative to inflation conditions.

Japan is facing similar pressures after producer prices accelerated at the fastest pace since 2014, increasing pressure on the Bank of Japan to tighten policy further despite years of ultra loose monetary settings. Long duration bonds have suffered the largest losses globally because they are most sensitive to inflation expectations and interest rate changes.

Market participants now believe the trajectory of oil prices will determine the direction of global bond markets over the coming months. Without a diplomatic breakthrough between Washington and Tehran, investors expect energy costs to remain elevated, keeping inflation high and forcing central banks to maintain restrictive monetary policies for longer than previously expected.