Bond yields surge as Fed holds rates, BoE stands pat

European government bond yields climbed on Thursday after a sharp sell-off in U.S. Treasuries triggered by the Federal Reserve's decision to hold interest rates steady, while the Bank of England also kept rates unchanged amid escalating Middle East tensions and persistent inflation concerns.

Fed Decision Sparks Global Bond Sell-Off

Germany's 30-year Bund yield rose to a two-month high, tracking the U.S. 30-year Treasury yield after it reached its highest level in 19 years at 5.24% following the Fed's announcement. The 10-year Bund yield climbed to 3.17%, while the UK 10-year Gilt yield stood at 5.03%.moderndiplomacy+1

The FOMC voted 9-3 to keep rates in the 3.50-3.75% range, with three dissenters — Hammack, Kashkari, and Logan — preferring a quarter-point hike. Fed Chair Kevin Warsh offered no forward guidance, telling markets to "play the ball, not the referee," a stance analysts said undermined the central bank's inflation-fighting credibility. The sell-off in long-dated bonds reflected growing investor skepticism that inflation, running well above the Fed's 2% target, would be brought under control without further tightening.fxstreet+2

Bank of England Holds at 3.75%

The Bank of England held its benchmark rate at 3.75% as expected, with Governor Andrew Bailey citing the ongoing Strait of Hormuz blockade and broader Middle East risks as key uncertainties for the inflation outlook. The MPC vote was anticipated at 7-2, with Chief Economist Hugh Pill and external member Catherine Mann seen as likely dissenters favoring a hike.mezha+1

Bailey stressed that the signal given in March — indicating no intention to cut rates quickly due to the threat from the U.S.-Iran conflict — remained in place. Futures markets pointed to a 25-basis-point rate increase by November.mezha

Oil Prices and Geopolitical Tensions Add Pressure

Rising energy prices compounded upward pressure on yields. Brent crude climbed around 2% after renewed U.S. military strikes against Iranian targets, including dozens of IRGC sites, intensified fears over global energy supplies. Reports of a drone strike targeting a U.S.-owned gas storage tanker at Egypt's Mediterranean port of Damietta further rattled markets.moderndiplomacy+1

While short-term European bond yields edged lower — causing yield curves to steepen as traders scaled back expectations for an immediate Fed hike — the combination of elevated oil prices and geopolitical instability kept longer-dated yields firmly higher. Investors now await U.S. Core PCE data and preliminary Q2 GDP figures later Thursday for further direction on the inflation and growth outlook.fxstreet+2