Global Business Today
Global Bond Selloff Deepens Amid Inflation Fears
Global bond markets extended losses on Monday as rising energy prices linked to the ongoing Middle East conflict intensified inflation concerns and increased expectations of further interest rate hikes by major central banks.
The selloff affected government bonds across major economies, with U.S. Treasury yields climbing to one-year highs while Japanese government bond yields reached record levels amid mounting concerns over inflation, fiscal spending, and tighter monetary policy conditions.
Benchmark 10-year U.S. Treasury yields, which move inversely to bond prices, rose to 4.6310 per cent in early Asian trading, marking their highest level since February 2025 after gaining more than 20 basis points last week.
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The two-year Treasury yield climbed to a 14-month high of 4.1020 per cent, while the 30-year Treasury yield advanced to a one-year peak of 5.1590 per cent.
The latest market movements followed renewed increases in oil prices after efforts to ease tensions in the Middle East appeared to stall following reports of a drone strike at a nuclear power facility in the United Arab Emirates.
Investors have increasingly expressed concerns over the economic consequences of the prolonged conflict, particularly its impact on inflation, global growth, and monetary policy decisions by central banks.
Charu Chanana, chief investment strategist at Saxo, said inflation expectations were beginning to reshape market sentiment regarding future interest rate policy.
“The ‘higher for longer’ story is coming back, even if actual rate hikes are still not the base case,” Chanana said.
The latest selloff was further intensified by reports that Japan’s government is preparing to issue additional debt to fund a supplementary budget aimed at cushioning the economic impact of the Middle East conflict.
The anticipated fiscal expansion added pressure to already strained government finances and contributed to heavy selling in Japan’s bond market.
Yields on Japan’s 30-year government bond rose more than 10 basis points to a record high of 4.200 per cent, while the 10-year yield climbed to 2.800 per cent, its highest level since October 1996.
DBS senior rates strategist Eugene Leow said concerns over Japan’s additional borrowing worsened existing market anxieties.
“Sentiment was already weak heading into last week’s close. Additional fiscal spending from Japan definitely worsened matters,” Leow said.
“This feels like a rolling re-pricing across curves in the region as investors grapple with inflation worries,” he added.
Financial markets have also increased expectations that major central banks may tighten monetary policy further in response to persistent inflationary pressures.
According to the CME FedWatch tool, investors are now pricing in more than a 50 per cent probability that the U.S. Federal Reserve could raise interest rates by December.
The European Central Bank is also expected to begin raising rates as early as next month, while markets anticipate the Bank of England could deliver approximately two rate increases this year.
In Europe, Germany’s bund futures and French OAT futures both declined sharply amid the broader global bond selloff.
The market rout followed heavy losses recorded last week after inflation data from several major economies exceeded market expectations.
Recent data showed consumer and producer prices in the United States accelerated in April, while inflation readings in China, Germany, and Japan also remained elevated.
Nick Twidale, chief markets analyst at ATFX Global, said recent economic data had reinforced fears that inflationary pressures linked to the Middle East conflict were beginning to spread through the global economy.
“The fact that we are now seeing data backing up inflationary fears that have been in the market since the Middle East conflict started I think is key,” Twidale said.
Investors also closely monitored last week’s summit between U.S. President Donald Trump and Chinese President Xi Jinping, hoping for coordinated diplomatic efforts to ease tensions in the Middle East.
However, the meeting failed to produce significant progress regarding the conflict or reopening of the Strait of Hormuz, a critical global energy shipping route.
“As the Trump-Xi meeting did little to raise hopes for a coordinated U.S.-China effort to pressure Iran into reopening the Strait of Hormuz, the combination of a persistent oil supply shock, increasing inflation rates and still-resilient demand became a recipe for higher interest rates,” Barclays analysts said.
Although the bond market selloff has become global, analysts noted that local political and fiscal issues also contributed to market volatility in individual economies.
In the United Kingdom, government bond yields surged last week to their highest levels in decades amid growing political uncertainty surrounding Prime Minister Keir Starmer following significant Labour Party losses in local elections.
Investors remain concerned that rising borrowing costs, inflationary pressures, and geopolitical tensions could weaken global economic growth while forcing central banks to maintain restrictive monetary policy conditions for longer than previously expected.
Market participants are also monitoring oil prices closely as continued disruptions linked to the Middle East conflict could further increase inflation risks and prolong the current cycle of elevated interest rates.
The recent repricing in bond markets reflects growing concerns that central banks may have limited flexibility to ease monetary policy despite slowing global growth conditions.
Financial institutions also warned that continued volatility in bond markets could tighten financial conditions further across major economies, raising borrowing costs for governments, businesses, and households.
Investors are expected to monitor upcoming inflation data, central bank policy meetings, and geopolitical developments closely for further signals regarding the direction of global interest rates and economic growth.
