Government bond markets caught their breath on Tuesday after a selloff that pushed the US 10-year Treasury yield to 5.27%, its highest level since 2007, but the relief looks temporary with US inflation and jobs data due later this week. Oil stayed firm above $105 a barrel, keeping pressure on an inflation outlook that has already forced the Federal Reserve back into hiking mode.
The September move has been brutal by bond market standards. The 10-year yield has risen nearly half a percentage point this month, on track for its biggest monthly jump since 2024, while the two-year yield has climbed more than half a point for its largest monthly rise since February 2023. The 30-year bond touched 5.57% on Monday, a level last seen in May 2004. French 10-year yields sat at their highest since 2008, and Germany’s benchmark 10-year reached 3.62%, a level unseen since June 2009.
Why yields keep climbing
Three forces are stacked on top of each other. The seven-month Middle East conflict has kept Brent crude above $100 for weeks, feeding directly into inflation expectations. A resilient US economy has refused to give the Fed a reason to ease, with markets now pricing a 72% chance of a second straight 25 basis point hike at the end of October, according to CME FedWatch data. And heavy government bond issuance, competing with a wave of borrowing from AI companies building data centers, has flooded the market with supply at the worst possible moment.
The result is a repricing of the entire cost of capital. Swap markets now fully price at least three more 25 basis point hikes over the next 12 months, with a fourth possible. Real yields, the inflation-adjusted return on government debt, have broken toward levels not seen since the Lehman era. Because sovereign yields anchor everything else, the move flows through to mortgages, corporate borrowing and the discount rates applied to every risk asset on the planet.
Stocks feel the squeeze
Wall Street dropped on Monday, with the S&P 500 falling 0.8% to 7,683.69, the Dow losing 0.7% to 51,481.51 and the Nasdaq sliding 0.9% to 26,820.38. The damage concentrated in long-duration assets: tech and growth stocks whose valuations depend on discounting future earnings at rates that keep rising. New lows on the NYSE outnumbered new highs for the tenth consecutive session, a breadth signal that contradicts the relatively modest index declines and suggests the average stock is in worse shape than the averages imply.
Asian shares fell across most of the region on Tuesday, with Tokyo, Seoul, Hong Kong and Mumbai all down, though Shanghai and Sydney bucked the trend. European tech helped the STOXX 600 edge up 0.3%, and US futures pointed to a muted open. The dollar held firm against the euro at $1.1347 and the yen at 157.34, positioned for its first monthly gain since June. Gold, often a hedge in turbulent markets, offered no shelter this time: the metal fell to around $4,140 an ounce as rising real yields made a non-interest-bearing asset expensive to hold.
The week that decides the path
Two data releases now carry unusual weight. Wednesday’s PCE report, the Fed’s preferred inflation gauge, is expected to show strong inflation-adjusted consumer spending in August, though annual figures may get some help from methodological revisions. Friday’s payrolls report carries a consensus around 90,000 jobs for September with unemployment near 4.1%. A resilient labor report would hand the rates market more ammunition to push yields higher, since strong employment strengthens the case for the Fed to keep rates restrictive. The unusual dynamic of this cycle is that good economic news has become bad news for markets, because it validates the hawkish path rather than signaling strength.
Oil remains the wildcard. Brent traded near $107 early Tuesday after Iranian officials reportedly turned pessimistic about a deal before the US midterm elections, then eased back as reports circulated that Washington might be open to sanctions relief and the release of frozen Iranian assets in exchange for progress on the nuclear issue. Qatari mediators are working both sides. The Strait of Hormuz, closed or heavily restricted through much of the conflict, is the prize: reopening it would knock tens of dollars off crude and change the inflation picture overnight. Traders are not pricing an imminent breakthrough, but neither are they pricing a permanent closure.
The Reserve Bank of Australia moves first
Australia’s central bank delivered the week’s first rate decision, lifting its cash rate 25 basis points to 4.60%, the highest in 15 years and its fourth hike of 2026. The bank said higher fuel costs were pushing up prices across the economy while growth and inflation had come in stronger than expected, and it flagged the risk of further increases. Inflation in Australia sits at 3.5%, well above target, and the RBA’s statement read like a preview of what other central banks face: energy costs are doing the tightening work for them, and every month oil stays above $100 makes the case for higher policy rates harder to argue against.
The European Central Bank has already hiked this month and signaled more to come, while the Bank of England left rates unchanged but warned it may have to raise them if the conflict drags on. The era in which central banks could look through an energy shock is over, at least for now, because the shock has lasted too long and spread too far into refined product prices.
What would end the selloff
For bond investors, the question is whether 5.27% on the 10-year is the peak or a waypoint. Yields have risen for seven straight months, and the selloff has yet to show the exhaustion signals that typically end such runs. The obvious circuit breakers are a Hormuz reopening, a soft payrolls print or a Fed signal that it sees enough slowdown coming to stop hiking. None is visible today. Until inflation data cooperates or oil breaks lower, the path of least resistance in rates remains upward, and everything priced off the risk-free curve, from mortgages to crypto to growth stocks, sits downstream of that.