Government bond markets experienced a significant decline globally, leading to a surge in yields from Japan to the United States amid growing concerns that the ongoing war-related price shocks could prompt central banks to increase interest rates to mitigate the impact.
The decline was primarily driven by longer-dated bonds, which are more sensitive to rising inflation. Specifically, 30-year yields approached their highest levels since 2023. In the U.S., yields on 10-year bonds climbed more than 11 basis points, nearing 4.60 percent, marking the largest weekly increase since April 2025 when President Donald Trump’s tariffs disrupted markets.
In Japan, the yield on 30-year bonds reached 4 percent for the first time since their issuance in 1999. The UK faced a similar situation, with the selling pressure compounded by a political crisis threatening Prime Minister Keir Starmer’s leadership, as 30-year gilt yields hit a 28-year high. Similar trends were observed in developing markets.
This selloff coincided with rising crude oil prices and escalating conflicts between the U.S. and Iran, which have disrupted key shipments through the Strait of Hormuz. Concerns were further exacerbated by recent U.S. reports highlighting sharp increases in consumer and wholesale prices, raising speculation about potential tightening of monetary policy by the Federal Reserve and other central banks.
“Bond yields definitely feel like they are getting unhinged,” remarked Subadra Rajappa, head of research at Societe Generale Americas, in an interview with Bloomberg Television. “The market is not only testing the Fed, it’s putting Congress on notice. The longer that interest rates remain high, financing costs go higher.”
As concern transitioned from the financial markets to political discussions, Japanese Finance Minister Satsuki Katayama indicated that she and her Group-of-Seven counterparts would address the bond selloff during their upcoming meeting in Paris.
Rising bond yields not only increase borrowing costs for governments but also impede global economic growth by influencing the costs associated with business and consumer loans. Investors are increasingly worried that higher yields could lead to a decline in equity prices. U.S. stocks fell on Friday, reversing part of a robust rally that had begun in late March.
“Any further rise at the long end of the bond curve threatens to worsen valuation jitters and unsettle a rally increasingly driven by long-duration equities,” warned Edward Harrison, a strategist for Markets Live.
Although yields had been gradually increasing in recent days, the selloff accelerated on Friday, with yields rising in Germany, Spain, Australia, and New Zealand. John Briggs, head of U.S. rates strategy at Natixis North America, noted, “The reestablishment of trades favoring bonds has been placed under pressure again this week with inflation data globally higher than expected, alongside rising oil prices.” He suggested that 10-year Treasury yields may continue to climb.
Federal Reserve Governor Michael Barr stated on Thursday that inflation poses a significant risk to the economy following a sharp increase in producer costs, the fastest since 2022. Traders are now pricing in a nearly two-thirds chance of an interest rate hike by the Fed in December, even under the incoming chair, Kevin Warsh, appointed by Trump to replace Jerome Powell.
“Markets are starting to price the Fed having to work harder to tamp down inflation,” noted Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle Investments, emphasizing that the bond market’s downturn signals both inflation concerns and an overheating economy.
In Japan, rising yields reflect renewed worries regarding fiscal policy, with reports suggesting the government may consider an extra budget to support the economy. However, Finance Minister Katayama later asserted that the situation had not escalated to that level.
“In Japan, where interest rates have remained near zero for an extended period, the rise of the 30-year JGB yield to 4 percent is historic,” stated Rinto Maruyama, a senior FX and rates strategist at SMBC Nikko Securities Inc. This development could indicate a potential for sustained inflation, an issue that has long plagued Japan.
Yields throughout the Japanese yield curve increased significantly on Friday, with the 20-year rate reaching levels not seen since 1996 and the 40-year yield hitting its highest since its debut in 2007.
In the UK, an unfolding leadership contest posed threats to Prime Minister Starmer’s spending restraint initiatives, further aggravating the bond selloff on Friday. The yield on 10-year gilts surged to 5.17 percent, the highest since 2008. Benchmark UK yields have risen by nearly a percentage point since the onset of U.S. and Israeli attacks on Iran. Traders have shifted from predicting Bank of England interest rate cuts to forecasting hikes, with swaps markets indicating at least two such increases by the year’s end.
