A global bond sell-off deepened on Thursday, with major nations experiencing their highest borrowing costs of the year. This was triggered by a surge in oil prices, nearing $100 a barrel, which reignited fears of an inflation shock. For instance, the 10-year German yield rose by as much as 0.03 percentage points to 3.21%, marking its highest level since 2011. US Treasury yields advanced close to their Iran war peak, reaching 4.68% in early trading. Similarly, the 10-year French bond yield touched 4% for the first time since 2009, and the UK gilt yield climbed to 5.08%.
Escalating conflicts between the US and Iran have undermined investor confidence in the full reopening of the Strait of Hormuz, while Iran-backed Houthi militants announced a blockade of Saudi Arabia. These geopolitical tensions pushed crude oil prices to a seven-week high. Mike Bell, head of market strategy at RBC Blue Bay Asset Management, warned against ignoring these political risks, while Jon Hill, head of US inflation strategy at Barclays, highlighted that rising inflation expectations suggest the Federal Reserve might struggle to address the issue effectively.
Investors are now anticipating further interest rate hikes. The European Central Bank (ECB) is expected to keep rates steady for now, but traders are pricing in at least two more quarter-point increases by next April. The Federal Reserve is also projected to raise rates by a quarter point at least twice by March, a significant reversal from earlier expectations of rate cuts. New Fed chair Kevin Warsh has signaled independence from President Donald Trump, who has consistently pressured the central bank to lower rates. Short-term inflation expectations rose, with the one-year US inflation swap reaching 4.15%, its highest since January 2025.
