Global bond yields surge as oil prices fuel inflation concerns.
2026-09-02 01:24:03
Global bond yields surged on Tuesday, buoyed by renewed tensions between the US and Iran that strengthened inflation expectations and market anticipation of a possible interest rate hike in the coming months. Data showed that the yield on the 10-year US Treasury note climbed to 4.798%, a new high since January 2025; the yield on the 2-year US Treasury note rose to 4.369%, the highest closing level in 19 months, reflecting market bets on a Federal Reserve rate hike in September. Data also showed that US one-year inflation expectations, as measured by the derivatives market, have risen slightly from less than 2% to 2.5% in the past few weeks. The yield on the 10-year Japanese government bond broke through 3%, reaching a 30-year high; the yield on the 10-year German government bond touched 3.364%, the first time since 2011. 
The yield on 10-year UK government bonds rose to 5.255%, a new high since 2008, while the yield on 30-year bonds reached a level not seen since 1998. Metzler Bank analyst Leon Ferdinand Bost stated, "Rising energy prices have triggered inflation fears, and global bonds are experiencing a perfect storm, which in turn has pushed up market expectations for interest rate hikes. At the same time, fiscal concerns have returned to the market focus, coupled with a large supply of government bonds, continuing to suppress the performance of long-term bonds." This rise in yields stems from signals given by Federal Reserve Chairman Kevin Warsh at the Jackson Hole symposium last Friday—the battle against inflation is not over. Warsh stated, "We must be confident that core inflation is clearly and rapidly returning to our target. Otherwise, we still need to continue to take action." Warsh's remarks prompted investors to raise their expectations for a Fed rate hike. Following this, earlier this week, the US military launched its first strike on Iran in a month, prompting a retaliatory attack from Iran, further pushing up oil prices. Tensions in the Middle East kept Brent crude prices above $90 per barrel, with Brent crude rising 2.4% to $92.65 per barrel. Christoph Rieg, head of interest rate and credit research at Commerzbank, wrote in a research report, "The bond sell-off has intensified further." Warsh clearly stated that bringing inflation back to the target level is his unquestionable priority. Data shows that the US money market is pricing in a 65% probability of a Fed rate hike on September 16; before Warsh's speech last Friday, the market was pricing in only about a one-third probability of a rate hike. Ronald Temple, chief market strategist at Lazard Asset Management, stated in a research report that the core issue is that US inflation remains far above the Fed's 2% target, and while the labor market has seen a decline in activity, it is not necessarily weakening. Temple believes that even if the job market cools down, the Fed will most likely still focus on combating inflation. "On the surface, fluctuations in employment data point to a cooling labor market; however, at the same time, inflationary pressures remain too high, and the risks cannot yet be declared eliminated." Strong US employment data last Friday, especially the upcoming US inflation data next week, may further fuel expectations of an interest rate hike. Evelyn Gomez-Lichty, a multi-asset strategist at Mizuho, noted in a research report: "Even if the situation in the Strait of Hormuz does not escalate fully, high oil prices will continue to push up inflation. This makes the rationale for maintaining the current interest rate difficult to justify." However, a September rate hike by the Federal Reserve is not a certainty. Aditya Bawe and Shruti Mishra, US economists at Bank of America Securities, stated in a research report: "We have long believed that the Fed should raise rates in September. We cannot draw conclusions yet; if the August data is extremely weak, it could still change the current situation." "But without significantly negative data that falls short of expectations, the pressure will be on Warsh: he needs to implement a September rate hike. Otherwise, we believe the credibility of the policy he established last Friday will be damaged." The current rise in bond yields is unfavorable to the US Treasury's plans. The yield on 30-year U.S. Treasury bonds had previously surged to a 19-year high, and the Treasury had intended to lower financing costs. The U.S. Treasury recently announced that it will increase the scale of long-term bond repurchases.
The yield on 10-year UK government bonds rose to 5.255%, a new high since 2008, while the yield on 30-year bonds reached a level not seen since 1998. Metzler Bank analyst Leon Ferdinand Bost stated, "Rising energy prices have triggered inflation fears, and global bonds are experiencing a perfect storm, which in turn has pushed up market expectations for interest rate hikes. At the same time, fiscal concerns have returned to the market focus, coupled with a large supply of government bonds, continuing to suppress the performance of long-term bonds." This rise in yields stems from signals given by Federal Reserve Chairman Kevin Warsh at the Jackson Hole symposium last Friday—the battle against inflation is not over. Warsh stated, "We must be confident that core inflation is clearly and rapidly returning to our target. Otherwise, we still need to continue to take action." Warsh's remarks prompted investors to raise their expectations for a Fed rate hike. Following this, earlier this week, the US military launched its first strike on Iran in a month, prompting a retaliatory attack from Iran, further pushing up oil prices. Tensions in the Middle East kept Brent crude prices above $90 per barrel, with Brent crude rising 2.4% to $92.65 per barrel. Christoph Rieg, head of interest rate and credit research at Commerzbank, wrote in a research report, "The bond sell-off has intensified further." Warsh clearly stated that bringing inflation back to the target level is his unquestionable priority. Data shows that the US money market is pricing in a 65% probability of a Fed rate hike on September 16; before Warsh's speech last Friday, the market was pricing in only about a one-third probability of a rate hike. Ronald Temple, chief market strategist at Lazard Asset Management, stated in a research report that the core issue is that US inflation remains far above the Fed's 2% target, and while the labor market has seen a decline in activity, it is not necessarily weakening. Temple believes that even if the job market cools down, the Fed will most likely still focus on combating inflation. "On the surface, fluctuations in employment data point to a cooling labor market; however, at the same time, inflationary pressures remain too high, and the risks cannot yet be declared eliminated." Strong US employment data last Friday, especially the upcoming US inflation data next week, may further fuel expectations of an interest rate hike. Evelyn Gomez-Lichty, a multi-asset strategist at Mizuho, noted in a research report: "Even if the situation in the Strait of Hormuz does not escalate fully, high oil prices will continue to push up inflation. This makes the rationale for maintaining the current interest rate difficult to justify." However, a September rate hike by the Federal Reserve is not a certainty. Aditya Bawe and Shruti Mishra, US economists at Bank of America Securities, stated in a research report: "We have long believed that the Fed should raise rates in September. We cannot draw conclusions yet; if the August data is extremely weak, it could still change the current situation." "But without significantly negative data that falls short of expectations, the pressure will be on Warsh: he needs to implement a September rate hike. Otherwise, we believe the credibility of the policy he established last Friday will be damaged." The current rise in bond yields is unfavorable to the US Treasury's plans. The yield on 30-year U.S. Treasury bonds had previously surged to a 19-year high, and the Treasury had intended to lower financing costs. The U.S. Treasury recently announced that it will increase the scale of long-term bond repurchases.
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