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Global bond sell-off sends US treasury yields to multi-decade highs as Iran war drags on
US Treasury yields hit multi-decade highs as the Iran war, higher oil prices and Strait of Hormuz risks fuel inflation and global bond market fears.
Global government bonds came under heavy selling pressure on Tuesday, pushing borrowing costs higher across major economies. Investors are becoming increasingly worried that the war between the US and Iran could last longer, keeping inflation and interest rates high.
The latest bond sell-off came after hopes for a new US-Iran deal faded. A possible window for reaching an agreement closed without any major breakthrough, bringing inflation concerns back to the center of investor attention.
US-Iran war keeps markets worried
US President Donald Trump said Monday that he would not extend the ceasefire between Washington and Tehran. Iran also issued fresh threats of military escalation. Both sides have rejected further peace talks, according to CNBC.
The Strait of Hormuz is once again at the center of investor concerns. A cargo vessel was hit by a projectile overnight while passing through the waterway. The Strait of Hormuz is a major shipping route for global trade and energy supplies. Its effective closure during the nearly six-month war has disrupted the movement of oil and other important commodities, pushing up their prices.
Oil prices rise above $90
Oil prices continued to rise on Tuesday as investors worried about a longer disruption. Brent crude, the global oil benchmark, was trading above $90 a barrel, CNBC reported. Higher oil prices are creating fresh inflation worries. If energy costs remain high for a longer period, businesses and consumers could face higher prices, making it harder for central banks to bring inflation down.
Those inflation concerns are now showing up in the bond market. Investors are demanding higher yields on government debt as they prepare for the possibility that interest rates could remain high for longer.
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US Treasury yields hit major highs
The US 30-year Treasury yield climbed to 5.3275% at 4:16 a.m. ET on Tuesday. It was up almost 2 basis points and reached its highest level since 2002, CNBC reported. The 20-year Treasury yield also hit a major milestone. It reached its highest level since 2006, showing strong selling pressure in longer-term US government bonds.
The benchmark 10-year Treasury yield climbed to 4.74%. That was its highest level since 2007. A basis point is equal to 0.01 percentage point. Bond prices and bond yields move in opposite directions, meaning when investors sell bonds heavily, their prices fall and their yields rise.
Bond yields rise across the world
The bond sell-off was not limited to the US Government bonds across several major economies also saw yields rise to multi-year or multi-decade highs as investors reassessed the risks from the prolonged war.
Germany's 10-year government bond yield reached a 15-year high. The move showed that concerns about inflation and higher borrowing costs were spreading across European markets. France's 10-year government bond yield also jumped. It reached its highest level since 2008, CNBC reported. Japan's 10-year government bond yield climbed to 2.954%. That was above the 40-year high recorded earlier this year.
Bond yields also jumped in Britain, Italy, Switzerland and Canada. The broad move showed that investors were selling government debt across global markets rather than focusing only on US Treasurys.
Why investors are worried about inflation
Investors are now closely watching what the prolonged war could mean for inflation and interest rates. Dan Coatsworth, head of markets at AJ Bell, said unsuccessful attempts to end the war have pushed inflation fears and the possibility of interest-rate hikes back into focus.
But higher long-term bond yields are not only about inflation or interest rates. Coatsworth said they can also reflect concerns about high government borrowing and the possibility that investors will demand more compensation for holding long-term government debt. That means governments could face higher borrowing costs if yields stay elevated. Higher yields make it more expensive for governments to borrow money through the bond market.
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US-Iran deal hopes fade, bond market falls
Deutsche Bank strategist Jim Reid said there was no single event behind the bond market's decline over the previous 24 hours. Instead, several concerns were building at the same time, particularly the lack of progress toward a US-Iran agreement. Reid said investors were increasingly pricing in a longer closure of the Strait of Hormuz. With no clear signs of a deal between Washington and Tehran, markets are preparing for the disruption to continue, according to CNBC.
A longer closure of the waterway could keep oil prices elevated. Reid said investors were pricing in another prolonged period of higher oil prices. Higher oil prices could put more pressure on inflation. This creates a difficult situation for central banks because they may have less room to cut interest rates if price pressures remain strong.
Long-term bonds Face more selling pressure
The biggest pressure was seen in longer-dated government bonds. Reid said growing concerns about a longer closure of the Strait of Hormuz put pressure on fixed-income markets, particularly longer-term sovereign bonds.
The market reaction shows how closely the war is now linked to global financial markets. Any further disruption to oil supplies could affect energy prices, inflation expectations, interest rates and government borrowing costs around the world.
For investors, the key issue is whether the conflict continues to disrupt energy supplies. If the Strait of Hormuz remains effectively closed and oil stays above $90 a barrel, markets could remain under pressure as investors prepare for a longer period of inflation and higher borrowing costs.
