Geopolitical events, particularly the Middle East conflict and its impact on oil prices and supply chains, have driven global bond yields higher in the first half of 2026. While a simple explanation might attribute this to temporary war-related inflation that could reverse with a conflict resolution, strategists at ING Bank NV, Goldman Sachs Group Inc., and Barclays Plc suggest that longer-term borrowing costs will likely remain elevated. This is because other significant drivers are at play, beyond just inflationary pressures from the war.
In the U.S., real yields (which exclude inflation) have had a greater impact on overall bond yields, according to a Bloomberg analysis. This indicates that investors are concerned about more than just inflation fueled by the Iran war. Additional factors contributing to persistently high yields include the swelling public debt burdens, the investment boom in artificial intelligence, and the growing possibility that central banks like the Federal Reserve will raise interest rates rather than cut them. For example, President Donald Trump's tax cut initiatives could further increase the U.S. debt and the need to sell Treasuries.
Higher economic growth spurred by an AI boom would likely lead investors to favor equities, consequently requiring higher yields from bonds to compensate. Barclays' Hill suggests that the neutral rate might have increased, justifying higher yields where 5% rates on 10-year Treasuries are no longer considered a "bargain." Even if the Strait of Hormuz reopens, Padhraic Garvey, regional head of research for the Americas at ING, believes long-term rates could remain "stranded at elevated levels" as real yields stay high.
In contrast to the U.S., rising breakeven rates have primarily accounted for the increase in 10-year yields in Japan and Germany since the war began. Europe is experiencing higher natural gas prices. In Japan, inflation pressures were mounting even before the war, and the Bank of Japan's reluctance to hike rates is reportedly forcing investors to demand more compensation for inflation risks. The European Central Bank (ECB) was the first G7 central bank to hike rates this year at its June 11 meeting, with two more 25 basis point hikes anticipated before the ECB holds rates at 2.75% into 2027. The German Bund yield, for instance, broke above 3.0% after the Middle East conflict started and is forecasted to rise modestly toward 3.25% this year and 3.40% in 2027.
