Global Bond Market Selloff Intensifies Amid Rising Oil Prices

Global Bond Markets Plummet Amid Fears of Interest Rate Hikes

Government bond markets worldwide tumbled on intensifying fears that the war-driven price shock will force central banks to raise interest rates to contain its impact. The rout was led by longer-dated bonds that are the most vulnerable to accelerating inflation.

In the US, 10-year yields rose 10 basis points to 4.58%, the highest in a year, capping the biggest weekly jump since President Donald Trump's tariffs threw markets into a tailspin in April 2025. Japan's 30-year yield hit 4% for the first time since the bonds were issued in 1999. In the UK, 30-year gilt yields reached a 28-year high, compounded by a political crisis that's imperiling Prime Minister Keir Starmer's leadership.

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The selloff came as crude oil prices climbed and the US and Iran show little signs of ending a conflict that's cut off key shipments through the Strait of Hormuz. This has compounded worries sparked by back-to-back US reports that showed a sharp rise in consumer and wholesale prices, fueling speculation that the Federal Reserve and other central banks will need to shift to tightening monetary policy.

The rise in bond yields is increasing borrowing costs for other governments, exerting a drag on the pace of global economic growth by rippling through to the cost of business and consumer loans. Investors are also beginning to express concerns that it could reverse the run-up in equity prices. US stocks dropped Friday, pulling back from what has been a sharp rally since late March.

While bond yields gradually moved higher in recent days, the selloff gathered pace on Friday, with yields in Germany, Spain, Australia, and New Zealand also pushing up. The establishment of trades favoring bonds have been placed under pressure again this week with inflation data globally higher than expected, and oil prices rising.

Fed Governor Michael Barr said on Thursday that inflation is the overwhelming risk facing the economy after producer costs accelerated at the fastest pace since 2022. Traders are pricing in an almost two-thirds chance the Fed will hike interest rates in December, even with the central bank under incoming Chair Kevin Warsh, who Trump picked to replace Jerome Powell.

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The rise in yields also reflects renewed concerns over Japan's fiscal policy. The government is weighing an extra budget to fund relief measures for the economy. Finance Minister Satsuki Katayama later said the situation has not yet reached the point where that's needed. In Japan, the yield on the 30-year JGB has risen to 4%, a historic milestone that suggests the possibility of sustained inflation in Japan, which has long been plagued by deflation.

The UK has been gripped by a brewing leadership contest that could cause a shift away from Prime Minister Starmer's efforts to restrain the government's spending. This added to the bond selloff on Friday amid signs that Manchester Mayor Andy Burnham may have a path to challenge Starmer's leadership. Traders have also flipped from expecting the Bank of England to cut interest rate cuts to bracing for hikes, with swaps markets pricing in at least two such increases by year-end.

"The move higher in global bond yields is a little unsettling," said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities in Singapore. An extended and persistently high oil price could be the nail in the coffin for bonds.