A sell-off in global bond markets deepened on Tuesday, with Japan’s 10-year government bond yield hitting 3% for the first time since 1996 as energy-driven inflation, monetary tightening, and worsening fiscal conditions rattled debt markets worldwide.
The rout swept through every major economy. US 10-year Treasury yields rose to 4.79%, their highest since January 2025. Britain’s 10-year gilt yield surged 10 basis points to 5.25%, its highest since 2008. Germany’s 10-year Bund yield climbed to 3.35%, a level not seen since 2011, while France’s 10-year yield hit 4.21%, the highest since 2008. Euro zone inflation rose above 3% in August, cementing bets on a September European Central Bank rate rise.
The scale of the shift was underscored by the Japanese milestone. For over a decade, massive central bank debt purchases had kept JGB yields artificially low, making 3% on a 10-year bond practically unthinkable until recently. Five-year JGB yields also hit a record high of 2.26%, reflecting expectations that the Bank of Japan will continue raising rates.
Oil, Rates, and Fiscal Fears
Brent crude rose 2% to over $92 a barrel on Tuesday and European natural gas prices reached their highest since March, after Monday saw the first exchange of direct attacks between the US and Iran in a month. The energy price surge has compounded inflation fears that were already building from sticky core prices in the US and Europe.
Tai Hui, APAC chief market strategist at J.P. Morgan Asset Management, said the Middle East standoff risks pushing energy prices higher while “few actions have been taken to consolidate fiscal deficits in both economies.” The US national debt has passed $40 trillion, and Japan’s aggressive investment plans under Prime Minister Sanae Takaichi add further fiscal pressure on a government already carrying the developed world’s largest debt pile.
A deluge of bond sales from large technology companies raising money to fund the AI boom has also contributed to the government bond selloff. These corporate issuances compete for the same pool of capital, pushing yields higher across the curve and making it more expensive for governments to roll over existing debt.
US 30-year Treasury yields hit 5.27%, just 6 basis points below levels seen before the US Treasury stepped into markets in August to cap rising borrowing costs. That intervention has now been almost entirely unwound, with yields recovering roughly two-thirds of their post-intervention decline in a matter of weeks.
Different Forces, Same Direction
Analysts noted that while the headline numbers pointed to a synchronized global selloff, the underlying drivers varied by region. Frances Cheung, OCBC’s head of FX and rates strategy, said “in Europe and the UK it is more because of heightened inflation expectations, while in the US the upticks in long-end yields are still more driven by higher real yields although inflation expectations have been creeping up too.”
Real yields, the return a bond investor demands above inflation, reflect the true borrowing cost for governments and companies. Rising real yields in the US suggest that investors are demanding more compensation for holding long-dated debt, independent of the inflation outlook.
New Fed Chair Kevin Warsh had attempted to restore confidence with hawkish comments at Jackson Hole, signaling the Fed takes inflation seriously. The shift initially pushed longer-dated yields lower and shorter-dated ones higher as bets on a September rate hike rose to 60%. But the resumption of US-Iran conflict and higher energy prices have effectively undermined that stabilization effort.
“The hawkish pivot by Chair Warsh at Jackson Hole was going to rein in long-end yields and restore stability,” said Kenneth Broux, head of corporate research FX and rates at Societe Generale. “The resumption of the conflict between the US and Iran and higher energy prices has effectively killed that idea and added new bearish impetus to bonds.”
Contagion Risks
The interconnected nature of global bond markets means that moves in one market can push yields higher elsewhere. Australian 10-year yields notched their sharpest rise in five months on Tuesday, partly on fears that higher JGB yields would mean fewer Japanese buyers of Australian debt.
TD Securities senior rates strategist Prashant Newnaha said further Japanese yield rises could drive a gradual reallocation into Japanese assets. “It is a genuine regime change. JGBs were the anchor for global fixed income for a long time,” he said. “Now it has flipped.”
US Treasury Secretary Scott Bessent shrugged off worries about the bond market in an interview with Reuters on Sunday, saying the effect of higher energy prices would fade and higher yields reflected confidence in the economy. But as governments compete for the same broad pool of capital, that confidence argument may not hold if the sell-off continues to spread.
The Bank of England faces a particularly acute dilemma. UK gilt yields above 5% raise the cost of servicing government debt and mortgages at a time when the British economy is already struggling with weak growth. Markets are pricing in at least a 25-basis-point rate hike by the BoE in September, with a strong chance of a second increase depending on the inflation data.
Traders are now watching the Sep. 16 FOMC meeting and Friday’s US nonfarm payrolls report as the next key data points. A weaker-than-expected jobs print could slow the Fed’s rate-hike timeline, but inflation data in the coming weeks will ultimately determine whether central banks follow through on the tightening that bond markets are now pricing in across the developed world.
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