Global Government Bond Yields Skyrocket Amid Hot Inflation
Inflation shocks from energy prices are spreading worldwide: UK 10-year gilt yields are already at 5.18%, while Japan's GDP continues to grow amid global instability. Markets are bracing for a prolonged period of high rates.
.18%. The yield on 10-year UK government bonds has just broken through a level not seen since June 2008 — three months before the collapse of Lehman Brothers. 30-year Japanese bonds are trading at 4% for the first time since 1999. The US 30-year bond is holding above 5.12% — the US government hasn't had to borrow at such rates since 2007.
These are not isolated spikes. This is a synchronized sell-off of government bonds across the planet. Inflation shocks from the energy crisis are spreading worldwide, and government bond markets are screaming that the era of cheap money is not just over — it's buried under the rubble of the Strait of Hormuz.
Three Continents, One Fire
On Friday, May 15, the global bond sell-off accelerated. UK 10-year gilts surged 18.7 basis points in a single session, reaching 5.18%. 30-year bonds jumped to 5.85% — a high not seen since 1998. 2-year yields hit 4.56%.
In the US, the picture is no better. 10-year Treasuries settled at 4.63% — the highest since February 2025. 2-year yields, the most sensitive to Fed policy, touched 4.10% — a 14-month peak. 30-year bonds are holding at 5.16%.
Japan has its own turning point. 30-year JGBs broke through the psychological 4% mark for the first time in a quarter of a century. Japan's producer price index came in above expectations, and traders immediately priced in the likelihood of a rate hike by the Bank of Japan.
Germany is also in the game: 10-year Bunds rose 7.5 basis points to 3.12%. From Tokyo to New York, from London to Frankfurt — it's the same everywhere: yields are rising, bond prices are falling, investors are fleeing long-term debt.
The Oil Fuse of the Inflation Bomb
The main driver is energy. Brent is holding at $111 per barrel. The Strait of Hormuz remains partially closed. US-Iran negotiations are stalling — Tehran says Washington "has made no substantial concessions" and is merely trying to achieve what it couldn't through military force.
US April CPI surged to 3.8% — the highest since 2023. PPI jumped 6% year-over-year, with a monthly increase of 1.4% — the largest since March 2022. Inflation is no longer "transitory" or "controlled." It is seeping into every sector — from transportation to food.
Allianz Chief Economic Advisor Mohamed El-Erian points out directly: the rise in yields is driven by oil prices. The market no longer believes in a quick resolution to the conflict. Every day without a deal is another day of price pressure on energy.
The Japanese Paradox: GDP Growth Amid Global Fear
While the rest of the world is shaken, Japan's economy shows unexpected resilience. GDP grew 0.4% in the first quarter of 2026 — an improvement over Q4 2025. PMI in Q1 hit its highest since 2013. Retail sales, industrial production, the Tankan indicator — all positive.
But BNP Paribas warns: this data is from before the energy shock fully materialized. Q2 will likely show a slowdown. Consumer confidence already fell in March — broadly, across all components, from living standards assessment to willingness to buy durable goods.
The rise in Japanese bond yields to 4% is also a signal that the Bank of Japan may raise rates. For a country that has lived with zero rates for decades, this is a tectonic shift.
Who Wins in the Bond Rout
Short-term investors and cash holders. The yield on 6-month US Treasury bills is holding above 5.4%. Money market funds are attracting record inflows — why risk long-term bonds when short-term ones offer guaranteed returns above inflation?
Banks. Net interest income at the largest US banks is rising. JPMorgan and Bank of America are earning more on the spread between loan and deposit rates than at any other point in this cycle.
Losers are everyone holding long-term bonds. Pension funds, insurance companies, sovereign wealth funds — their portfolios are rapidly losing value. Governments needing to refinance debt face sharply higher borrowing costs.
The US housing market is also under pressure. Mortgage rates have already crossed 7.8% for 30-year loans. Existing home sales are falling. Builders in Texas and Florida are offering discounts of up to 10%.
Stock markets are nervous. The S&P 500 experienced its largest one-day drop since March. CFRA warns: the "domino effect" from the closure of the Strait of Hormuz will continue to pressure oil prices, fueling inflation and yields, and this combination hits consumer and investment confidence.
The Fed Rate Path Is No Longer Predictable
The futures market is pricing in a scenario that seemed unthinkable a month ago. The probability of a rate hike by December is 49%. Rate cuts in 2026 are no longer considered the base case.
Jeffrey Gundlach of DoubleLine Capital cuts to the chase: "The market expected two cuts this year, but inflation is not cooperating. When the 2-year yield exceeds the Fed funds rate by 50 basis points, the central bank simply cannot cut rates."
RBC Capital Markets warns: if the 10-year Treasury yield breaks 5%, the stock market will come under serious pressure. Bank of America advises locking in profits in early June — it will only get worse from there.
The Next Three Months
The base case: yields remain high, rates do not fall. Markets adapt to the new reality: cheap money is gone and will not return until the Strait of Hormuz opens.
The pessimistic case: the 10-year Treasury yield breaks 5%, mortgages go above 8.5%, the Fed is forced to raise rates in July or September. Bank of America warns: if monthly inflation does not slow, CPI could exceed 5% by the November elections. And historical data over 100 years shows that with inflation above 4%, the S&P 500 falls an average of 4% over three months and 7% over six months.
The only factor that could reverse the trend is a breakthrough in negotiations with Iran and the reopening of the Strait of Hormuz. But with Trump saying "time is running out" and Araghchi replying "we don't trust the Americans," markets are doing the only thing they can: pricing in the worst. And judging by yields, the worst is yet to come.
— Editorial Team
