Global bonds sell off as Middle East conflict escalates, further stoking inflation fears

New York (CNN) — Global bond yields rose Tuesday to their highest levels in decades as an escalation in the Middle East conflict pushed up oil prices and increased concerns that the Federal Reserve and other central banks could raise interest rates this month.

In Japan, the 10-year government bond yield hit 3% for the first time since 1996. In the UK, the 30-year yield reached the highest level since 1998. Germany’s 10-year yield hit its highest level since 2011.

Yields rise when bond prices fall. Investors are dumping bonds, pushing yields higher, as they assess the outlook for inflation and central bank interest rates.

Oil prices jumped to start the week, adding to nerves about inflation, as the US and Iran traded attacks for the first time in over a month. Brent crude, the global oil benchmark, pushed higher Tuesday after US officials said forces began striking Islamic Revolutionary Guard Corps (IRGC) targets in Iran at 12 p.m. ET.

Brent rose about 4.6% Tuesday to settle at $94.65 per barrel, its highest settle level in over a month. WTI, the US benchmark, rose 5.2% to settle at $90.22 per barrel, its first settle above $90 per barrel since July.

Bonds were already under pressure in recent weeks as investors reckoned with concerns about rising government deficits. Now the resurgent fighting in the Middle East and jump in oil prices is adding to bond market jitters.

Investors worry that a sustained increase in the price of oil could push overall inflation higher, making it harder for central banks to ease monetary policy. The bond market sell-off underscores investors’ anticipation of higher rates from central banks. As inflation risks increase, investors can also demand higher returns to hold longer-term debt.

“The longer the conflict abroad persists, the greater the risk [of] long-run inflation,” Tom Tzitzouris, head of fixed income research at Baird Strategas, wrote in a note.

The 10-year US Treasury yield, a key benchmark for mortgage rates and other costs for consumers, hit 4.8% on Tuesday, its highest level so far during President Donald Trump’s second term.

The 30-year yield, which responds most quickly to geopolitical events and nerves about government deficits, reached 5.27%. The 30-year yield in August rose above 5.3% and hit its highest level since 2007.

Bond yields help set interest rates across the economy. A steep rise in yields can push up the cost of mortgages, auto loans and commercial loans, making things more expensive for businesses and consumers alike.

Global phenomenon

Bond yields have climbed across different economies as investors weigh concerns about stubborn inflation and shifting bets on central bank rates while also grappling with longstanding concerns about mounting government deficits. A deluge of corporate bond supply to fund the AI buildout has also added pressure on the bond market.

The rise in yields this week comes on the heels of Federal Reserve Chairman Kevin Warsh’s remarks at the annual Jackson Hole Economic Policy Symposium on Friday, when the Fed chief said inflation was “concerning.” That has prompted investors to sell bonds as they reassess the odds of a rate hike at the US central bank’s upcoming meeting on September 15-16.

Yields are also surging as investors assess mounting government deficits. The US national debt topped a record $40 trillion in August, putting a spotlight on unease over America’s fiscal health. Investors are demanding greater compensation for the perceived risk of holding government debt.

Concerns about government deficits are a global phenomenon. Governments in Japan, the United Kingdom and France are all dealing with their own debt burdens, and investors are increasingly demanding higher rates to hold bonds. The 10-year yield in France on Tuesday hit its highest level since 2008, while the 10-year yield in Australia hit its highest level since 2011.

Finance ministers and central bank governors from G20 countries are meeting in Asheville, North Carolina, this week amid the backdrop of the global bond market sell-off.

The intensifying bond market sell-off comes just weeks after the Treasury Department announced it would increase the size of bond buybacks to help try and tame the rise in yields.

A jump in bond yields can also pose problems for the stock market. A steep rise in yields can alter calculations for stocks’ values. Higher yields on bonds can also pull investors away from riskier investments like stocks.

The rise in bond yields unsettled the stock market Tuesday: The S&P 500 fell 0.7%, while the Nasdaq Composite moved 1% lower. The S&P and Nasdaq are 2.2% and 3.8% away from record highs, respectively.

“If we continue to have this grind higher [in yields], I think stocks are going to feel it a little bit more,” Natalia Lojevsky, managing director at CIFC Asset Management, told CNN. “It’s definitely a headwind.”

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