Global government bond yields soar, sparking long-term concerns over inflation shocks triggered by war

U.S., U.K., Japan, and other major countries’ government bond yields surged sharply on the 15th. The reason is that after the Iran war, energy prices skyrocketed, intensifying concerns that inflationary pressures may persist long term. In addition, as fiscal burdens in various countries increased, government bonds—previously regarded as safe assets—faced large-scale selling pressure instead.

As the benchmark for the global bond market, the 10-year U.S. Treasury yield rose to 4.597% that day, up 13.8 basis points from the previous trading day (1bp=0.01 percentage points). The 2-year Treasury yield, which is sensitive to the outlook for benchmark rates, also rose to 4.08%, an increase of 9 basis points; the 30-year Treasury yield rose to 5.12%, breaking the 5.1% threshold. Long-term Treasury yields reaching such levels for the first time since July 2007 is being interpreted—because bond prices and yields move inversely—as investors conducting large-scale selling of bonds.

This is not unique to the United States. In the U.K., besides inflation worries, political uncertainty around Prime Minister Keir Starmer’s future intensified, leading to further acceleration in bond selling. At one point, the 10-year Treasury yield exceeded 5.18%, and the 30-year yield exceeded 5.86%. Yields in major eurozone countries such as Germany and Italy also rose in parallel. In Japan, with April’s inflation exceeding expectations, the 10-year Treasury yield rose into the 2.7% range, the highest level since 1997. Ultimately, war-driven increases in oil and natural gas prices—especially the possibility that a blockade of the Strait of Hormuz could become prolonged—shook the global bond market.

The sharp jump in yields is also closely related to the direction of U.S. monetary policy. On the 15th, Federal Reserve Chair Jerome Powell concluded his term as chair. On the 13th, the U.S. Federal Senate passed the nomination of Wosh, the candidate for the next chair. President Donald Trump had previously criticized the Fed for failing to cut interest rates in time, arguing that it imposed burdens on economic operations, but market sentiment ran counter to the president’s expectations. At Wosh’s nomination hearing, he also did not give a clear signal of rate cuts. At present, markets generally analyze that, given the current inflation environment, the Fed is unlikely to cut rates easily.

Real inflation indicators are making the Fed more cautious. The year-over-year increase in the U.S. April Producer Price Index (PPI) was 6.0%, reaching a new high since 2022; the Consumer Price Index (CPI) also rose 3.8%, the largest increase in about three years. On this basis, the market has begun not only to price in the possibility of rate cuts, but also the possibility of rate hikes. According to FedWatch data from the Chicago Mercantile Exchange (CME), as of the 15th, the interest-rate futures market estimated the probability that the Fed will raise rates before December this year at about 50%, about 70% before March next year, and about 80% before April. This trend suggests that if the inflation shock triggered by the war persists and concerns about fiscal health among countries continue, increases in major countries’ long-term government bond yields and uncertainty around monetary policy are likely to remain key variables in global financial markets in the short term.