Global bond rout deepens as inflation fears trigger rate-hike bets
By Rae Wee
SINGAPORE, May 18 (Reuters) – Tokyo-New York bonds extended losses on Monday as rising energy prices from the ongoing Middle East war fueled inflation fears and investors increased bets on interest rate hikes by global central banks.
Yields on 10-year U.S. Treasury notes, which move inversely to prices, rose more than 20 basis points last week to 4.631%, the highest level since February 2025.
While the two-year bond yield, which is the most sensitive to inflation and interest expectations, reached a 14-month high at 4.102%, the 30-year US Treasury bond yield rose to a one-year high at 5.159%.
Rising yields have lifted the US dollar and cast a shadow over stock markets, which have cast a shadow over artificial intelligence enthusiasm in recent weeks.[MKTS/GLOB][FRX/]
The bond selloff came as oil prices rose on Monday, with Brent crude futures trading at $111 a barrel, as efforts to end the Iran war appeared to stall after a drone attack on a nuclear power plant in the United Arab Emirates.
More than two months after the start of the Middle East war, investors are starting to worry about the economic consequences of the conflict and what it will mean for the global interest rate outlook as inflationary pressures mount.
“The ‘higher for longer’ narrative is coming back, even if actual rate hikes are not the base case,” said Charu Chanana, chief investment strategist at Saxo.
JAPANESE BONDS YIELD IS RECORD HIGH
Adding to Monday’s selloff was news that Japan’s government will likely issue new debt as part of planned extra budget financing to cushion the economic blow from the war, further exacerbating already strained government finances.
The yield on the 30-year Japanese government bond (JGB) increased by more than 10 basis points, reaching an all-time high of 4.200%, while the 10-year yield reached 2.800%, the highest level since October 1996.
DBS senior interest rate strategist Eugene Leow said the extra budget news would increase existing concerns in the bond market.
“Sentiment was already weak towards the close of last week. Japan’s additional fiscal spending has certainly worsened the situation,” Leow said.
“This feels like a constant repricing along the curves in the region as investors grapple with inflation concerns.”
Markets are currently pricing in an over 50% chance that the Fed will raise interest rates by December to combat rising inflation, according to the CME FedWatch tool.
The European Central Bank is expected to march as early as next month, and the Bank of England is expected to march about twice this year.
In Europe, German bond futures and French OAT futures fell about 0.4% and 0.45% respectively.
