Government bond markets from Tokyo to New York extended losses on Monday (18 May) as rising energy prices linked to the Middle East conflict heightened inflation concerns and reinforced expectations that major central banks could keep interest rates higher for longer.
U.S. Treasury yields climbed sharply, with the benchmark 10-year yield reaching its highest level since February 2025 at 4.631%, after rising by more than 20 basis points last week. The two-year Treasury yield, which is particularly sensitive to interest rate expectations, touched a 14-month high of 4.102%, while the 30-year yield rose to a one-year peak of 5.159%.
The surge in yields boosted the U.S. dollar and weighed on global equity markets, which had recently rallied on optimism surrounding artificial intelligence-driven growth.
The bond market sell-off coincided with another rise in oil prices, with Brent crude climbing to $111 per barrel after efforts to de-escalate the conflict involving Iran appeared to stall following a drone strike on a nuclear facility in the United Arab Emirates.
More than two months into the conflict, investors are becoming increasingly concerned about the broader economic consequences of sustained high energy prices and the impact this could have on inflation and global monetary policy.
Saxo Bank chief investment strategist Charu Chanana said markets were once again embracing the prospect of rates remaining elevated for a prolonged period.
“The ‘higher for longer’ story is coming back, even if actual rate hikes are still not the base case,” she said.
Investor sentiment was also rattled by reports that Japan’s government is expected to issue additional debt to finance a supplementary budget aimed at cushioning the domestic economic impact of the conflict.
The move added pressure to already strained public finances and pushed Japanese government bond yields sharply higher. The 30-year Japanese government bond yield jumped by more than 10 basis points to a record 4.200%, while the 10-year yield reached its highest level since October 1996 at 2.800%.
DBS Bank senior rates strategist Eugene Leow said the prospect of additional fiscal spending had compounded existing market concerns.
“Sentiment was already weak heading into last week’s close. Additional fiscal spending from Japan definitely worsened matters,” he said.
“This feels like a rolling repricing across curves in the region as investors grapple with inflation worries.”
Traders are now pricing in a greater than 50% probability that the Federal Reserve could raise interest rates by December, according to the CME FedWatch Tool, as policymakers respond to mounting inflationary pressures.
Markets are also anticipating further tightening from the European Central Bank as early as next month, while the Bank of England is expected to implement around two additional rate rises this year.
In Europe, German bund futures and French government bond futures both fell as investors continued to reduce exposure to fixed-income assets.
Monday’s market turmoil followed heavy losses last week after a series of stronger-than-expected inflation readings from major economies unsettled investors.
Recent data showed consumer and producer prices in the United States accelerated in April, with similar inflationary trends also reported in China, Germany and Japan.
ATFX Global chief markets analyst Nick Twidale said investors were now seeing economic data validate inflation concerns that had emerged since the start of the Middle East conflict.
“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,” he said.
Investors also closely monitored last week’s summit between U.S. President Donald Trump and Chinese President Xi Jinping, hoping for signs of coordinated diplomatic pressure on Iran and progress towards stabilising energy markets.
However, analysts said the meeting failed to provide reassurance.
Analysts at Barclays said the lack of progress in efforts to pressure Iran into reopening the Strait of Hormuz, combined with rising inflation and resilient global demand, had created conditions supportive of higher interest rates.
Meanwhile, in the United Kingdom, gilt yields surged to multi-decade highs as political uncertainty intensified following heavy local election losses for Prime Minister Keir Starmer and growing pressure within the Labour Party over his leadership.
A drone strike caused a fire at the Barakah nuclear power plant in the UAE, officials said on Sunday, with ...
As cities increasingly take on greater geopolitical significance amidst conflicts, climate change and shifting ...
China has launched the world’s first experiment to study how artificial human embryos develop in space, mark...
Iran and Pakistan reviewed bilateral ties and the latest developments in the stalled Iran-U.S. peace negotiations mediated by Islamabad, as Tehran ...
The World Urban Forum (WUF13) continues in Baku, Azerbaijan on 18 May, addressing the global housing crisis. The day’s agenda includes the of...
Children laughed, applauded and watched wide-eyed as animated characters lit up the screen at the opening of the ninth Animafilm International Animation Festival in Baku, where filmmakers and audiences from around the world gathered to celebrate the growing influence of animated cinema.
As cities increasingly take on greater geopolitical significance amidst conflicts, climate change and shifting global alliances, discussions at the World Urban Forum (WUF13) in Baku, Azerbaijan have gone beyond architecture and urban development according to a political analyst.
Iran and Pakistan reviewed bilateral ties and the latest developments in the stalled Iran-U.S. peace negotiations mediated by Islamabad, as Tehran and Washington continue to refuse tangible concessions amid a fragile ceasefire and escalating verbal threats.
North Korean leader Kim Jong Un said plans to strengthen frontline units on the border with South Korea, as well as other major units, were key to "more thoroughly deterring war," state media KCNA reported on Monday.
Bulgaria has won the Eurovision Song Contest for the first time, taking victory in a final overshadowed by a boycott over Israel’s participation and the war in Gaza.
At least eight people were injured after a driver rammed a car into pedestrians in the northern Italian city of Modena, authorities said on Saturday. Four of the victims were reported to be in serious condition.
U.S. President Donald Trump said Washington could destroy Iran’s infrastructure “in two days,” while Tehran warned the U.S. would face growing economic costs from the conflict. The remarks came as Hezbollah reported new attacks on Israeli forces despite an extended Lebanon ceasefire.
At least eight people have died and 32 others were injured after a freight train collided with a public bus at a railway crossing in Bangkok on Saturday (16 May), triggering a fire that quickly spread through the vehicle.
The World Urban Forum (WUF13) continues in Baku, Azerbaijan on 18 May, addressing the global housing crisis. The day’s agenda includes the official opening press conference, the WUF13 Urban Expo opening and a ministerial dialogue on the Nairobi Declaration to advance Africa's urban agenda.
Negotiations between Samsung Electronics and its workforce on Wednesday have broken down, officials said, raising fresh concerns over potential disruption to South Korea’s export-heavy economy.
By the time American shoppers began noticing higher prices on everything from trainers to televisions, the world's two largest economies were already deep in a trade war that left the world wondering how it would end.
The Strait of Hormuz remains a vital maritime chokepoint and serves as the primary artery linking the Persian Gulf to international energy markets. With approximately 20% of global oil and gas shipments transiting this waterway, it is the backbone of energy security for Asia, Europe, and beyond.
China’s exports grew faster than expected in April, as overseas buyers moved quickly to secure supplies amid fears that the conflict involving Iran could drive up global energy and transport costs.
Asian stocks surged to record highs on 7 May as investors priced in growing hopes of a potential Middle East peace deal, while oil prices eased and the U.S. dollar weakened amid shifting global risk sentiment.
You can download the AnewZ application from Play Store and the App Store.
What is your opinion on this topic?
Leave the first comment