Global Bond Yields Surge as Oil Prices Fuel Inflation Worries — 3rd Update

By Emese Bartha and Paulo Trevisani

Global bond yields surged Tuesday as renewed tension between the U.S. and Iran reinforced inflation expectations, which increased the prospect of interest-rate hikes.

The 10-year U.S. Treasury yield rose to 4.795%, the highest since January 2025, according to Tradeweb. The U.S. two-year Treasury yield reached 4.392%, its highest settlement also in 19 months, reflecting rising bets on an interest rate increase by the Federal Reserve in September.

One-year ahead U.S. inflation expectations, as measured by derivative markets, have crept up to 2.5% from less than 2% in the past couple of weeks, according to LSEG.

The 10-year Japanese government bond yield closed at 2.992%, the highest since Sept. 1996. The 10-year German Bund yield settled at 3.360%, a level not seen since April 2011.

In the U.K., the 10-year gilt yield reached 5.255%, its highest since 2008, before settling at 5.151%. The 30-year gilt yield rose to levels unseen since 1998.

Increasing demand for capital is behind the spike in borrowing costs, said Erik Aarts, senior fixed-income strategist at Touchstone Investments.

"The lenders, right, those that have the supply, are now increasingly in the driver's seat," he said.

Geopolitical and macroeconomic worries also contribute to the bonds selloff.

"Global bonds are facing a perfect storm of rising inflation fears, driven by higher energy prices, which are in turn raising rate hike expectations," Leon Ferdinand Bost, analyst at Metzler said. "At the same time, fiscal concerns are back at the forefront and together with heavy supply are weighing on the long end," he said.

The rise in yields followed Federal Reserve Chairman Kevin Warsh's message on Friday at the Jackson Hole symposium about unfinished work on fighting inflation.

"We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do," Warsh said.

Warsh's message caused investors to increase their expectations for the Federal Reserve to raise interest rates. Since then, oil prices have risen further after U.S. forces struck Iran for the first time in a month earlier this week, prompting Iranian retaliation.

An escalation in attacks in the Strait of Hormuz sent WTI crude oil prices back above $90 per barrel in the U.S., with European Brent closing 4.60% higher, at $94.65.

U.S. money markets priced a 68% probability of a rate increase on Sept. 16, having priced around a one-third possibility prior to Warsh's speech on Friday, according to CME.

U.S. inflation remains well above the Federal Reserve's 2% target, while the labor market--though less dynamic--is not necessarily weak, said Ronald Temple, chief market strategist at Lazard Asset Management, in a note.

"At first glance, fluctuating employment figures point to a cooling labor market. At the same time, inflationary pressure remains too high to sound the all-clear," Temple said.

Solid U.S. jobs data on Friday and, particularly, U.S. inflation data next week could add to rate-hike expectations.

Still, a Fed hike in September isn't a done deal.

"We've long argued that the Fed should deliver a September hike," Aditya Bhave and Shruti Mishra, U.S. economists at BofA Securities said in a note. "We aren't declaring victory yet, since very soft Aug data could still change the picture," they said.

"But absent a material downside surprise, the onus is now on Warsh to deliver a Sep hike. Otherwise, he risks undermining some of the credibility he gained on Friday, in our view."

Write to Emese Bartha at emese.bartha@wsj.com

Write to Paulo Trevisani at paulo.trevisani@wsj.com

(END) Dow Jones Newswires

September 01, 2026 16:31 ET (20:31 GMT)