Global bond markets are experiencing a significant sell-off, pushing borrowing costs for major nations to their highest levels of the year. This widespread decline is attributed to a surge in oil prices, with Brent crude nearing $100 per barrel, leading to renewed fears of inflation. The 10-year German yield, a benchmark for euro zone borrowing costs, rose to 3.21%, its highest since 2011. Similarly, the 10-year US Treasury yield reached 4.71%, a level not seen since January 2025, while the 10-year French bond yield touched 4% for the first time since 2009, and the UK gilt yield climbed to 5.08%.
The escalation of conflict in the Middle East, particularly renewed tensions between the US and Iran and Houthi militant attacks on Saudi oil tankers, is the primary driver of the oil price surge. Brent crude jumped 7% on Thursday, nearing $100 per barrel, and has risen about 35% this month and over 60% since the start of the year. US crude oil also rose 4% to almost $91 per barrel. Analysts like Mike Bell of RBC Blue Bay Asset Management are warning investors about underestimating political risk, while Jon Hill of Barclays notes that rising inflation expectations indicate central banks may struggle to contain the problem.
These developments are causing investors to anticipate more aggressive actions from central banks. Markets are now pricing in a 36% chance that the Federal Reserve will raise rates, with expectations for two quarter-point increases by March. The European Central Bank is expected to hold rates steady at its upcoming meeting, but traders anticipate a four-in-five chance of a hike in September. The one-year US inflation swap has risen to 4.20%, further cementing inflationary concerns sparked by the rising oil and gas prices. The national average gas price in the US also increased to $4.09 per gallon.
