Global Bond Rout Deepens as Oil Shock Pushes Yields to 3%

A deepening global bond rout pushed borrowing costs to multi-decade highs Tuesday, with Japan's 10-year yield touching 3% for the first time since 1996, as renewed Persian Gulf fighting lifted oil prices and investors braced for central bank rate hikes.

"There is now something of a sense of resignation — tinged with helplessness — about rising interest rates," said Ryutaro Kimura, senior strategist at BNP Paribas Asset Management in Tokyo.

The 10-year U.S. Treasury yield rose to 4.79%, its highest since January 2025, while the 30-year reached 5.27%. Britain's 10-year yield climbed above 5.24%, the highest since 2008, and Germany's equivalent rose to a 15-year high at 3.36%. France's 10-year hit its highest level since 2008.

The runup in rates carries profound consequences for the global economy, heaping pressure on home buyers, credit-card holders and especially governments that have borrowed heavily. Some strategists warn a sustained rise in yields could prick what many see as a bubble in AI-driven stocks.

"We're in the danger zone already," said Derek Halpenny, European head of global markets research at MUFG. The higher interest rates go, he said, the greater the risk of a disruptive stock-market unwind.

Brent crude rose 2% to $92.20 a barrel Tuesday and has climbed about 13% over the past month, with benchmark prices back above $94. The jump followed President Donald Trump's announcement of a fresh wave of U.S. strikes on Iran, the second escalation in two days. Iran retaliated with drone and missile attacks on U.S. bases in Jordan and struck two supertankers carrying Saudi oil near Oman's coast.

Higher energy prices feed directly into inflation expectations, forcing bond investors to demand higher yields to hold longer-dated debt. That dynamic is compounded by central banks making clear they are not done fighting inflation. Federal Reserve Chairman Kevin Warsh said Friday at the Jackson Hole symposium that inflation remains "concerning," prompting traders to raise bets on a September rate hike. CME FedWatch data now prices a 65 percent chance of a hike at the Fed's Sept. 15-16 meeting, up from 40 percent a week ago.

Money markets are also fully pricing a rate increase from the European Central Bank this month, while investors expect the Bank of Japan, Reserve Bank of Australia and Reserve Bank of New Zealand to tighten in coming weeks.

Japan's Yield Breakout Reshapes Global Anchors

Japan's bond market has been swept by one of the most aggressive selloffs this year, with the 10-year yield rising to 3% from around 2% in January. After decades battling deflation, inflation is now on the rise, and the Bank of Japan has been slow to raise rates, weighing on the yen. Markets now expect the BOJ's rate to end the year at around 1.4 percent, while three months ago investors had expected the central bank to hold at 1 percent all year.

Heavily indebted countries, including the U.S., have been hit hardest. This reflects investor concerns about a potential debt spiral, in which higher yields drive up the cost of refinancing existing debts, requiring even more borrowing. The U.S. national debt topped a record $40 trillion in August, putting a spotlight on fiscal unease. A flood of bonds issued by U.S. tech companies to finance the artificial-intelligence boom is also pushing yields higher by eating into demand for government debt, investors say.

The bond selloff has yet to trigger a broader rout in currencies and stocks, though equity indexes fell Tuesday. The Dow Jones Industrial Average declined 0.8%, the S&P 500 retreated 0.7% and the Nasdaq composite lost 1%. S&P 500 futures were down 0.7% Tuesday morning, while Nasdaq 100 futures sank 1.3%.

"The higher yields go, the bigger strain it provides to this particular sector, which is one of the largest growth drivers of equity markets," said Aneeka Gupta, senior strategist at WisdomTree, referring to tech companies borrowing heavily to fund AI investments.

Ben Kizemchuk, a portfolio manager at Wellington-Altus Private Wealth in Toronto, said Japanese yields are coming into greater alignment with those in the U.S. and Europe. "It's more like a global repricing of sovereign debt," he said. "Markets are beginning to price in a world where economies are converging."

The last time Japan's 10-year yield traded near 3% was in 1996, before the country's banking crisis and two decades of deflation reset global yields. The current repricing suggests investors now view Japan's fiscal trajectory through the same lens as other heavily indebted economies.

Rising yields are leading investors like Florian Ielpo, a portfolio manager at Lombard Odier Investment Managers, to rethink strategies that give greater weight to stocks over bonds. As yields rise, the steady income of bonds becomes more attractive relative to risky equities. He still prefers stocks for now, but his mind is beginning to change.

Finance ministers and central bank governors from G20 countries are meeting in Asheville, North Carolina, this week against the backdrop of the global bond selloff. Treasury Secretary Scott Bessent said Monday he expects the Japanese government and BOJ to take steps toward a stronger yen, reinforcing market bets on BOJ tightening.

This article is for informational purposes only and does not constitute investment advice.