Global bond yields surge as Hormuz deadlock lifts oil prices

Government bond yields across the world's major economies climbed sharply this week as a breakdown in U.S.-Iran negotiations over the Strait of Hormuz sent crude oil prices surging, reviving fears that persistent inflation will force central banks to tighten monetary policy further.

Oil-Driven Selloff Sweeps Sovereign Debt Markets

The 10-year U.S. Treasury yield rose to 4.70% on Monday after WTI crude oil surged more than 5%, then added another basis point to reach 4.71% in early Tuesday trading. The 30-year Treasury yield climbed to 5.25%, near its highest level in 19 years. In Europe, the 10-year German Bund yield advanced to 3.198%, its highest since August 3, while the 10-year U.K. gilt yield rose to 4.989%. Indian government bonds also sold off on Tuesday, with the benchmark 2036 bond yield rising to 6.79% as India's status as the world's third-largest oil importer left it exposed to crude price swings.investing+3

The catalyst was a collapse in diplomatic momentum over reopening the Strait of Hormuz. Iranian Foreign Minister Abbas Araghchi said an agreement with Oman was "very close" but conditioned reopening on the U.S. ending its blockade of Iranian shipping, withdrawing forces, removing sanctions, and compensating Iran for war damages. President Trump rejected the compensation demand, saying he would instead "demand compensation from Iran for people killed and wounded with roadside bombs and many conflicts" over decades. Brent crude reached $87.70 a barrel on Monday, a roughly 5% daily gain.barchart+1

Fed Hawkishness and the CPI Test Ahead

Cleveland Fed President Beth Hammack added to the pressure on bonds Monday, saying inflation "is not coming down on its own" and that the current interest rate is not meaningfully restricting the economy, adding that "some number" of rate hikes would likely be needed. Markets are now pricing a 52% probability of a 25-basis-point rate hike at the September Federal Open Market Committee meeting, up from 44% a day earlier.economictimes+1

Attention now turns to Wednesday's U.S. Consumer Price Index report, which will test whether the oil-driven inflation impulse is filtering through to broader prices. European fixed-income desks are also bracing for eurozone second-quarter GDP data and revised July inflation readings from Germany, France, and Spain later this week. Markets are discounting a 90% chance of a 25-basis-point rate hike by the European Central Bank at its September 10 meeting.barchart+1

Political Pressure Mounts Before Midterms

The bond selloff carries political implications for the Trump administration ahead of November's midterm elections. The U.S. national debt has swelled past $40 trillion, with annual interest payments exceeding $1 trillion. Rising long-term yields feed directly into mortgage rates — the 30-year fixed-rate mortgage averaged 6.69% last week, its highest in a year, according to Freddie Mac Federal Home Loan Mortgage Corporation ↗ 6.01%. The Seoul Economic Daily reported that Treasury Secretary Scott Bessent has been signaling to Wall Street that he wants to prevent a further rise in long-term yields, with the Treasury hinting it may reduce long-term debt auctions in coming quarters.sedaily