Global bond rout deepens as inflation fears mount

By Rae Wee

SINGAPORE, May 18 (Reuters) – Bonds from Tokyo to New York extended losses on Monday as rising energy prices from the ongoing Middle East war fanned inflation fears and stoked investor wagers on rate hikes from global central banks.

Benchmark 10-year U.S. Treasury yields, which move inversely to prices, jumped to their highest since February 2025 in early Asia trade at 4.6310%, having climbed more than 20 basis points last week.

The two-year yield touched a 14-month top of 4.1020%, while the 30-year U.S. Treasury yield rose to a one-year high of 5.1590%.

The moves came on the back of a climb in oil prices on Monday, as efforts to end the Iran war appeared to have stalled following a drone strike at a nuclear power plant in the United Arab Emirates.

“Fresh drone attacks on the UAE’s Barakah nuclear plant and Saudi territory, coupled with Trump’s ‘clock is ticking’ ultimatum and a planned Situation Room meeting on Tuesday, have sharply elevated the risk of renewed full-scale hostilities,” said analysts at OCBC.

More than two months into the Middle East war, investors are beginning to fret about the economic fallout from the conflict as inflationary pressures mount and what that would mean for the global interest rate outlook.

“The ‘higher for longer’ story is coming back, even if actual rate hikes are still not the base case,” said Charu Chanana, Saxo’s chief investment strategist.

Markets are now pricing in a more than 50% chance the Federal Reserve would raise rates by December, according to the CME FedWatch tool, while the European Central Bank is seen hiking as early as next month and the Bank of England about twice this year.

The move in U.S. Treasury yields spilled over to the broader market, with Germany’s bund futures and French OAT futures falling about 0.4% each in early trading.

In Japan, yields on the 30-year Japanese government bond (JGB) jumped 17 bps to their highest on record at 4.170% while the 10-year yield touched its highest since October 1996 at 2.800%.

The selloff in JGBs accelerated after Reuters reported that Tokyo will likely issue fresh debt as part of funding for a planned extra budget to cushion the economic blow from the Middle East war.

Following the report, Japanese Prime Minister Sanae Takaichi said she had ordered the finance minister to consider funding measures including an extra budget last week.

DBS senior rates strategist Eugene Leow said news of the extra budget would compound current bond market anxieties.

“Sentiment was already weak heading into last week’s close. Additional fiscal spending from Japan definitely worsened matters,” Leow said. “This feels like a rolling re-pricing across curves in the region as investors grapple with inflation worries.”

INFLATIONARY PRESSURES COMING THROUGH

Monday’s rout followed a steep selloff from last week, as investors were spooked by a recent raft of hotter-than-expected inflation figures globally, particularly in the United States.

“The fact that we are now seeing data backing up inflationary fears that have been in the market since the Middle East conflict started I think is key,” said Nick Twidale, chief markets analyst at ATFX Global.

Data last week showed U.S. consumer and producer prices surged in April, with similar readings seen in China, Germany and Japan.

Much emphasis had also been placed on a closely watched two-day summit between U.S. President Donald Trump and Chinese President Xi Jinping last week, where investor hopes for a breakthrough in the Middle East war fell flat.

“As the Trump-Xi meeting…did little to raise hopes for a coordinated U.S.-China effort to pressure Iran into reopening the Strait of Hormuz, the combination of a persistent oil supply shock, increasing inflation rates and still-resilient demand became a recipe for higher interest rates,” said analysts at Barclays.

Though the bond rout was global, many of the drivers were at least partly local in nature.

UK gilt yields surged last week, hitting their highest in decades, as pressure mounts on Prime Minister Keir Starmer to resign over his Labour Party’s hefty losses in local elections, and as challengers emerge.

(Reporting by Rae Wee; additional reporting by Ankur Banerjee; Editing by Sam Holmes)