Government bonds across major economies suffered a sharp selloff on Monday, driven by escalating geopolitical tensions in the Middle East and surging oil prices that have revived expectations for tighter monetary policy. The yield on the benchmark U.S. 10-year Treasury note climbed to 4.631%, its highest level since February 2025, as investors recalibrated their outlook for interest rates.
The move marked a significant shift in market sentiment, which had previously been leaning toward easier policy. Traders are now pricing in a greater than 50% probability that the Federal Reserve will raise rates by December, while euro zone markets see an 80% chance of an ECB rate hike next month and three increases by the end of the year.
Oil prices remain the primary catalyst, with Brent crude trading in the $110–$111 per barrel range following a drone strike that ignited a fire at a nuclear power plant in the United Arab Emirates. The Strait of Hormuz, a critical chokepoint for roughly 20% of the world's oil and gas trade, remains largely closed, compounding supply fears.
Japan experienced some of the most severe pressure. The 30-year Japanese government bond yield surged to a record 4.200%, while the 10-year yield touched its highest since October 1996. The move came amid reports that Tokyo may issue additional debt to cushion the economic blow from the conflict. DBS strategist Eugene Leow described the selloff as a “rolling re-pricing” as investors grapple with persistent inflation risks.
In Europe, Germany's 10-year Bund yield reached a 15-year high of 3.193%. British gilts were a relative outlier, with the 10-year yield easing 4 basis points to 5.14%, though it had jumped 26 basis points the prior week to an 18-year peak.
The bond rout spilled over into equity markets. European stocks fell 0.5%, Japan's Nikkei slipped 1%, and futures for the S&P 500 and Nasdaq also declined as higher yields threatened valuations, particularly in growth and technology shares. Lale Akoner, global market strategist at eToro, warned that “higher yields do not stay confined to bond markets,” as they can pressure equity valuations and heavily indebted governments.
Travel stocks were especially hard hit in Europe, with Ryanair, Lufthansa, and EasyJet falling between 2% and 3.1%. Michele Morganti at Generali Investments noted that European equities remain vulnerable relative to U.S. peers due to weaker earnings momentum and greater exposure to energy costs.
The selloff also dominated discussions at a G7 meeting in Paris, where finance ministers and central bankers addressed inflation, market volatility, and public debt. French Finance Minister Roland Lescure characterized the moves as a correction rather than a collapse, while ECB President Christine Lagarde acknowledged the gravity, stating, “I always worry, that's my job.”
Currency markets reflected the strain. The dollar index dipped to 99.12 but remained near recent highs, while India's rupee hit a record low as higher oil prices and rising global yields added pressure on emerging-market assets. Gold edged up from a six-week low, though rising rates limited its appeal as the metal pays no yield.
Recent inflation data from the United States, China, Germany, and Japan had already unnerved investors last week. Nick Twidale, chief markets analyst at ATFX Global, said the key change is that data are now validating the inflation fears that have built since the Middle East conflict began.
Not all analysts see the selloff as a one-way bet. Kenneth Broux at Societe Generale suggested that stopping what he called a “slow-motion crash” would require lower oil prices, recession fears strong enough to drive haven demand for bonds, or yields high enough to lure buyers back. For now, markets are treating the oil shock as a rates shock, leaving central banks with a difficult choice: inflation is rising due to supply stress, while the same higher prices threaten to slow growth.
