Global bond selloff sends yields to multi-year highs amid U.S.-Iran conflict

A wave of selling swept through global bond markets on Monday as escalating U.S.-Iran military strikes pushed oil prices above $89 a barrel and Federal Reserve Chair Kevin Warsh's recent warning about persistent inflation rattled investors already nervous about rising borrowing costs worldwide.

The yield on the benchmark U.S. 10-year Treasury note climbed above 4.75%, its highest level since January 2025, while Germany's 10-year Bund yield rose 3 basis points to 3.30%, a level not seen since May 2011. French 10-year yields reached 4.15%, and the 30-year hit 4.92% — both levels last touched during the 2008 financial crisis. In Japan, two-year and 10-year government bond yields climbed to their highest since the mid-1990s.wsj+2

War, Oil, and Inflation Fears Converge

The immediate catalyst was a fresh round of hostilities in the Strait of Hormuz. U.S. forces struck two missile launchers on Iran's Larak Island on Sunday, the first known American military action against Iran since late July, according to Reuters. Tehran said it responded with counterattacks targeting U.S. air bases in Jordan. Brent crude jumped more than 2% to trade around $89.80 a barrel.marketscreener+1

The geopolitical shock landed on markets already unsettled by Warsh's Friday speech at the Jackson Hole symposium, where he said inflation remains too high and that the Fed's policy rate may need to rise further. The Fed's preferred PCE inflation measure rose 3.7% year-over-year in July, well above the 2% target. Traders now price a roughly 80% chance the European Central Bank will deliver a second rate hike by December, on top of one widely expected in September.devdiscourse+1

Spillover Across Europe

"Overall, Bunds cannot defy U.S. Treasuries headwinds, but should still outperform as the market is well-prepared for the next ECB rate hike," said Rainer Guntermann, rate strategist at Commerzbank. Germany's two-year yield touched 2.91%, its highest since July 2024, while France's risk premium over Bunds held at 84 basis points after widening to 88 basis points last week.devdiscourse

The STOXX 600 edged lower, though it remained on track for a fifth consecutive monthly gain. Germany's DAX dropped 0.7%, and on Wall Street the Dow Jones Industrial Average fell 0.7% while the S&P 500 slipped 0.3%. Energy stocks bucked the trend, rising more than 2%.mezha+1

Broader Risks Mount

The selloff is already filtering into consumer borrowing costs. The average 30-year U.S. fixed mortgage rate reached 6.81% as of August 28, just 4 basis points below its 52-week high. New-home sales fell 10.5% in July, and mortgage applications declined for the week ended August 21.cryptorank

Gabriel Felbermayr, a member of Germany's Council of Economic Experts, warned that the dynamics carry systemic risks. "The risk of a larger global sovereign debt crisis is currently very high," he told Reuters. Finance leaders from the G20 gather in North Carolina on Monday and Tuesday as elevated energy prices linked to the Iran conflict weigh on growth prospects. The August U.S. employment report, due Friday, will be the next major test of whether the bond rout has further to run.reuters+1