Global bond yields climbed back to the highest level in almost two decades as rising oil prices fueled inflation concerns and investors ramped up expectations for interest-rate hikes. The move started on last Friday after Federal Reserve Chairman Kevin Warsh doubled down on his vow to finally tame inflation, and was extended this week as energy prices rose on renewed conflicts in the Middle East. The rate on 10-year Japanese government notes touched 3% for the first time since 1996, UK 30-year yields reached the highest since 1998 and the 10-year Treasury rate hit levels last seen January last year. The yield on a Bloomberg gauge of global sovereign bonds advanced for a fourth straight session on Monday, rising to 3.72%, the highest since mid-2008. “Markets are pricing in a higher path for short rates in the US, but also globally,” Idanna Appio, a portfolio manager and senior research analyst at First Eagle Investments, said on Bloomberg TV. “Investors are beginning to reassess what neutral policy rates look like and there has been a gradual increase in those.”
Global bonds have been under pressure for months, with worries over elevated government spending in markets like Japan, the UK and the US prompting investors to seek higher compensation to own longer-maturity debt. At the same time, a surge in borrowing by US technology firms to fund artificial intelligence is potentially crowding out demand for sovereign bonds. Meanwhile, fresh hostilities between the US and Iran have raised concerns about prolonged disruptions to energy flows through the Strait of Hormuz, sending oil prices higher. Several current and former officials have said they expect the Middle East conflict to drag on for months. “The direction of travel is going to be higher yields from here,” said Laura Cooper, global investment strategist at Nuveen. “Term premium likely has to be higher to compensate for this confluence of risks.” Traders are currently pricing an almost 70% chance that the Federal Reserve hikes rates by a quarter-point at its meeting this month, an increase from the European Central Bank is fully priced in for next week, while they’re all but certain the Bank of Japan will hike later this month. The bond selloff poses a fresh challenge for Treasury Secretary Scott Bessent, who last month unleashed more measures to keep yields contained, as well as for President Donald Trump, with higher borrowing costs threatening to weigh on the economy heading into the November midterms. Pressure on bonds is unlikely to ease, if seasonality is any guide. September and October have been the worst months for the global bond index over the last decade, with the gauge losing more than 1% on average in each of the two months during the period, according to data compiled by Bloomberg.