A sell-off of bonds from key countries worldwide deepened on Tuesday, sending government borrowing costs soaring and equities lower as investors fretted that energy-driven inflation would force central bankers to hike interest rates.
The latest bout of fighting between the United States and Iran has pushed oil prices higher, stoking fears of tighter monetary policy that could weigh on economic growth. Oil prices jumped around 2% on Tuesday after the US and Iran traded fire for the first time in weeks, and US President Donald Trump threatened to hit Iran "hard".
Heavy selling sent the interest rate on 30-year UK government bonds to its highest since 1998, while the 10-year yield surged to a level not seen since the global financial crisis of 2007-08. Japan's 10-year bond yield touched a 30-year high of 3%, reflecting worries about plans for massive government spending. Yields also hit their highest in 15 years in Germany and their highest since 2008 in the UK, according to The Economic Times. In the US, the 10-year yield rose 3 basis points to 4.788%, putting it in range of its highest level since 2023, and the 30-year Treasury bond yield stood at 5.27%, not far from levels last seen in 2007.
"The bond sell-off has … been a global affair," said Deutsche Bank's Jim Reid. He said the "main culprit was the weekend escalation in the Middle East that saw the US and Iran exchange strikes for the first time since late July". After six months of war, the conflict remains at an impasse, with Tehran keeping the strategic Strait of Hormuz closed and Washington maintaining a counter-blockade of Iranian ports.
"With Trump now threatening further action against Iran, including against Kharg Island, Iran's key oil export hub, supply worries are once again front and centre," said Susannah Streeter of Wealth Club.
European stocks tumbled, with Frankfurt shedding more than one percent and London also falling as trading resumed after a public holiday. Asian stock markets on Tuesday followed Wall Street lower, with Tokyo, Hong Kong and Shanghai all falling. Shein shares slumped 10% at one point on its Hong Kong trading debut, having raised $1.7 billion in an IPO, while MediaTek shares soared nearly 10% after Nvidia announced it had injected $3.5 billion into the company, according to the Bangkok Post.
Official data showed that eurozone inflation hit a three-year high at 3.3% in August, cementing expectations that the European Central Bank would raise interest rates next week. Traders are also awaiting key economic data ahead of the US Federal Reserve's policy meeting on September 16. Bets on a rate increase surged after Fed chair Kevin Warsh gave a hawkish speech on Friday.
Some of the world's leading economies, notably the US, have sharply increased their debt loads in recent years through deficit spending, with the US debt hitting $40 trillion - a shift investors warn is likely structural rather than episodic and will be difficult to remedy without tough choices at the national level. Meanwhile, wars from Russia-Ukraine to the Middle East have sent oil and gas prices higher, adding to pressure on interest rates and the cost of living.
"This is likely primarily a US-specific story, though global currents are amplifying it," said David Krakauer, vice president of portfolio management at Mercer Advisors. "The core drivers are largely domestic: deficit spending, the cost of servicing a rising debt load, and shifting Treasury auction dynamics."
Frederic Neumann, HSBC chief Asia economist, said many developed markets have seen long-term funding costs rise due to increased borrowing needs from public and private sectors.
The yen weakened against the dollar after US Treasury Secretary Scott Bessent told CNBC he expected Japan to support the currency. His comments were seen as a signal for the Bank of Japan to tighten monetary policy when it meets this month.