Bond Yields Surge as Oil Prices Fuel Inflation Worries -- Update

By Emese Bartha

Global bond yields surged Tuesday as renewed tension between the U.S. and Iran reinforced inflation expectations, which increased the prospect of interest-rate hikes in the coming months.

The 10-year U.S. Treasury yield rose to 4.792%, the highest since January 2025, according to LSEG data. The 10-year Japanese government bond yield crossed 3% to hit a 30-year high. The 10-year German Bund yield reached 3.364%, unseen since 2011.

In the U.K., the 10-year gilt yield rose to 5.254%, its highest since 2008, while the 30-year gilt yield rose to levels unseen since 1998.

"Global bonds are facing a perfect storm of rising inflation fears, driven by higher energy prices, which are in turn raising rate hike expectations," Leon Ferdinand Bost, analyst at Metzler said. "At the same time, fiscal concerns are back at the forefront and together with heavy supply are weighing on the long end," he said.

The rise in yields followed Federal Reserve Chairman Kevin Warsh's message on Friday at the Jackson Hole symposium about unfinished work on fighting inflation.

"We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do," Warsh said.

Warsh's message caused investors to increase their expectations for the Federal Reserve to raise interest rates. Since then, oil prices have risen further after U.S. forces struck Iran for the first time in a month earlier this week, prompting Iranian retaliation.

Middle East tensions kept the price of Brent crude oil above $90 per barrel, with Brent last trading up 1.9% at $92.19.

"[The] bond rout deepens," said Christoph Rieger, head of rates and credit research at Commerzbank in a note.

Warsh provided clarity that bringing inflation back to target is his undisputable priority. U.S. money markets priced a 65% probability of a rate increase on Sept. 16, having priced around a one-third possibility prior to Warsh's speech on Friday, according to LSEG.

The crucial factor is that U.S. inflation remains well above the Federal Reserve's 2% target, while the labor market--though less dynamic--is not necessarily weak, said Ronald Temple, chief market strategist at Lazard Asset Management, in a note.

The Fed is thus likely to remain heavily focused on fighting inflation despite cooling employment dynamics, Temple said.

"At first glance, fluctuating employment figures point to a cooling labor market. At the same time, inflationary pressure remains too high to sound the all-clear."

Solid U.S. jobs data on Friday and, particularly, U.S. inflation data next week could add to rate-hike expectations.

Elevated oil prices "[keep] the inflation channel alive even without a full escalation through [the Strait of] Hormuz," Evelyne Gomez-Liechti, multi-asset strategist at Mizuho said in a note. This makes it harder to argue that interest rates should stay on hold, she said.

Still, a Fed hike in September isn't a done deal.

"We continue to expect the Fed to hold rates at the September meeting," said Greg Gizzi, head of fixed income and municipal bonds at Nomura Asset Management International.

The probability of a hike at the October or December meetings has certainly increased, though any move remains contingent on incoming data, Gizzi said.

The upward pressure on bond yields bodes ill for the U.S. Treasury's intentions to lower borrowing costs in the wake of the recent surge of the 30-year Treasury yield to a 19-year high.

The Treasury recently announced increased buybacks of long-end securities.

Write to Emese Bartha at emese.bartha@wsj.com

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September 01, 2026 06:02 ET (10:02 GMT)