Global borrowing costs are sharply increasing as soaring energy prices, particularly oil around $100 a barrel, are intensifying fears of stagflation—a combination of weak economic growth and high inflation. This has led to a widespread sell-off in government bonds across major economies.
Key benchmarks are reflecting this pressure. The yield on German 10-year bonds, considered the euro area benchmark, crossed 3.5% for the first time since April 2011. Similarly, the U.S. 10-year note yield surpassed 4.9% for the first time in three years, and the 30-year Treasury yield climbed to 5.34%, its highest since 2007. In Asia, Japan's 10-year yield jumped 6 basis points, while Australia's and South Korea's 10-year yields rose by 12 and 8 basis points respectively.
Analysts at Deutsche Bank highlighted that fears of stagflation are rippling through various asset classes. They cited concerns such as continued shipping obstructions in the Strait of Hormuz and Red Sea, lower Saudi Arabian oil output, and hawkish commentary from the European Central Bank, which recently raised interest rates. The head of Germany's Bundesbank suggested the ECB might need to move into "mildly restrictive territory" if energy prices persist at high levels.
The surge in oil prices is partly attributed to geopolitical tensions, with Brent Crude futures at $105.4 a barrel and European natural gas futures hitting their highest level since 2022. Donald Trump's comments suggested a prolonged period of elevated oil prices, potentially until after the U.S. midterm elections. HSBC's Kim Fustier warned that if diplomacy fails regarding the Strait of Hormuz, Brent crude could rise to around $120 a barrel.
Investor nervousness is also exacerbated by mounting debt loads and spending plans of rich countries. A recent disappointment over a $6 billion Treasury buyback announcement and President Trump's proposal for a $5,000 dividend to every U.S. citizen, estimated to cost over $1 trillion, are further squeezing bond markets. A European bank strategist noted that bonds are facing a "double whammy" of rising oil prices and increased term premia due to U.S. credibility risks.
