Government bonds across major global markets, from Tokyo to New York, extended significant losses on Monday, spurred by escalating inflation fears. Rising energy prices, largely attributed to the ongoing Iran war, have fuelled investor expectations for impending interest rate hikes from central banks worldwide. This widespread sell-off saw benchmark 10-year U.S. Treasury yields jump to 4.631%, their highest since February 2025, after climbing more than 20 basis points last week. The two-year U.S. yield, sensitive to inflation expectations, touched a 14-month peak, with these elevated yields casting a shadow over stock markets that had recently surged on artificial intelligence enthusiasm.
The bond rout coincided with Brent crude futures hitting $111 a barrel, as efforts to de-escalate the Iran conflict appeared stalled. This environment dramatically shifted market expectations for monetary policy. The CME FedWatch tool now prices in a greater than 50% chance the U.S. Federal Reserve will raise rates by December, a stark reversal from pre-war expectations of rate cuts. Similarly, the European Central Bank is now anticipated to enact three rate hikes by year-end, with an 80% chance of a move next month, after being expected to remain on hold.
The global market pressure followed a raft of hotter-than-expected inflation figures reported last week across the U.S., China, Germany, and Japan. In Asia, Japan’s government bond market saw 30-year yields soar to a record 4.200% amidst news of fresh debt issuance to fund an extra budget. DBS senior rates strategist Eugene Leow noted that additional fiscal spending from Japan “definitely worsened matters,” describing it as a “rolling re-pricing across curves.” Euro zone bonds also felt the strain, with Germany’s 10-year yield, a key benchmark, reaching a 15-year high of 3.193%. French Finance Minister Roland Lescure, at a G7 finance ministers meeting in Paris, underscored the gravity by stating that “public debt is not a subject” to be ignored.
