Global Bond Yields Climb as Iran War Upends Market Rate Expectations

Global government bond yields are rising, and Middle East conflicts have caused energy prices to surge. Traders are betting that central banks around the world will raise interest rates.

U.S. Treasury yields have reached their highest levels in months, following a third consecutive week of declining bond prices, as markets speculate that the Federal Reserve may need to hike rates to combat inflation.

The 10-year Australian government bond yield climbed to its highest level since 2011 on Monday, while New Zealand’s government bond yields hit their highest since May 2024. Japanese and South Korean government bond yields also increased, and European bond futures declined.

Ed Al-Hussainy, portfolio manager at Columbia Threadneedle Investments, said, “The market is just a mess right now. Everyone’s in a state of ‘sell first, ask questions later.’”

Last week, U.S. Treasury yields also joined the global bond sell-off, driven by concerns over escalating tensions in Iran and rising oil prices. The Bank of England and the European Central Bank both hinted that tightening policy might be necessary. Federal Reserve Chair Jerome Powell stated that more progress on controlling inflation is needed before considering another rate cut.

Last week, the U.S. yield curve flattened, with the 2-year Treasury yield rising 18 basis points to 3.90%, and the 10-year yield increasing 10 basis points to 4.38%. Since the outbreak of the conflict, yields have risen by over 40 basis points.

Just last month, investors fully expected the Fed to cut rates twice this year, citing a fragile labor market. However, with the ongoing Iran conflict, interest rate swap data now suggest traders see about a 40% chance of rate hikes before October.

The Iran situation remains a key focus for investors in the new week. Iranian Parliament Speaker Mohammad Bagher Ghalibaf posted on social media that financial institutions purchasing U.S. Treasuries and their assets are also “legitimate targets.”

“Rather than a true escalation, this clearly shows that we are still far from any credible ceasefire or resolution,” said Justin Lin, investment strategist at Global X ETFs Australia.

In addition to monitoring the turmoil in the Middle East, investors will also pay attention to speeches from Federal Reserve officials such as Michael Barr and Vice Chair Philip Jefferson. Auctions of 2-year, 5-year, and 7-year Treasury notes will also reflect investor demand following the surge in yields.