Global government bond yields reached new highs on Tuesday, with some hitting levels not seen since 2008. This sell-off was primarily triggered by renewed fighting in the Middle East, specifically after fresh U.S. strikes against Iran and an attack on a tanker off Oman in the Strait of Hormuz. The escalating conflict pushed oil prices higher, with West Texas Intermediate futures rising over 1% to more than $87 per barrel and Brent crude advancing over 1% to above $92 per barrel.
The increase in oil prices and geopolitical instability fueled inflation concerns, leading traders to raise their bets on U.S. interest rate hikes. According to CME's FedWatch tool, there is now a 65% chance of a Fed rate hike in September, up from 40% just a week ago. This sentiment was further solidified by Federal Reserve Chair Kevin Warsh's hawkish statements last week. The 10-year U.S. Treasury note yield, a key benchmark, rose 3 basis points to 4.788%, its highest since January 14, 2025. The 30-year Treasury bond yield climbed over 2 basis points to 5.272%, and the 2-year Treasury note yield increased over 1 basis point to 4.362%.
The bond market turmoil extended globally. Japan's 10-year benchmark yield hit 3% for the first time since 1996, and Britain's 10-year yield surpassed 5.25%, reaching its highest since 2008. The equivalent German yield rose to a 15-year high of 3.36%. Analysts such as Ulrike Hoffmann-Burchardi of UBS and Ryutaro Kimura of BNP Paribas Asset Management noted that persistent inflation, large budget deficits, and uncertainty over the Fed's policy outlook are keeping bonds under pressure, suggesting that yield volatility is likely to continue.
The rising bond yields are also impacting equity markets. U.S. stock futures for the S&P 500 fell 0.6%, and Europe's STOXX 600 index dropped 0.5%. Experts, including Aneeka Gupta from WisdomTree, warned that higher yields could strain tech companies that rely on bond markets to fund massive AI investments, potentially impacting one of the largest growth drivers of equity markets. The Bloomberg index, which tracks global government bonds, saw its yield rise to 3.72%, the highest since mid-2008.
