Global bond markets suffered a fresh sell-off on Tuesday as investors priced in the prospect of higher interest rates to contain persistent inflation, rising energy costs and deteriorating government finances.
Japanese government bond yields led the move, with the benchmark 10-year rate reaching 3% for the first time since September 1996. Yields also climbed across the curve, while borrowing costs rose sharply in the United States, Britain and Europe. ([investing.com](https://www.investing.com/news/economy-news/global-bond-rout-deepens-as-japan-yield-hits-key-threshold-4883562?utm_source=openai))
The renewed fighting between the United States and Iran added to concerns about an energy-driven inflation shock. Brent crude settled $4.16 higher at $94.65 a barrel, while US West Texas Intermediate rose $4.46 to $90.22, both reaching their highest closing levels in around five weeks. ([investing.com](https://www.investing.com/news/commodities-news/oil-prices-settle-up-more-than-4-a-barrel-on-renewed-usiran-fighting-4884526?utm_source=openai))
Higher yields weighed on equities. The S&P 500 fell 0.7%, the Dow Jones Industrial Average lost 0.8% and the Nasdaq dropped 1%, while the energy sector outperformed as oil prices rose.
US Treasury yields also moved higher, with the 10-year rate reaching 4.80%, its strongest level since January 2025. Investors have become increasingly concerned that the Federal Reserve may need to tighten policy again if inflation fails to return convincingly to its 2% target.
Federal Reserve governor Michael Barr said on Tuesday that policymakers could afford to wait if inflation was clearly moderating, but added: “If inflation appears not to be moderating sufficiently, then I think we should act decisively to raise rates.” He was referring to the Federal Open Market Committee’s meeting on 15 and 16 September. ([federalreserve.gov](https://www.federalreserve.gov/newsevents/speech/barr20260901a.htm?utm_source=openai))
British government borrowing costs also rose sharply as the gilt market reopened after the public holiday. The 10-year gilt yield reached 5.2554%, its highest since June 2008, while the 30-year yield climbed to its highest level since 1998. ([lse.co.uk](https://www.lse.co.uk/news/pound-slips-despite-jump-in-gilt-yields-as-investors-favour-dollar-br3la46yhijfl4h.html?utm_source=openai))
Sterling slipped against the dollar despite the rise in gilt yields, as traders favoured the US currency amid renewed geopolitical and inflation concerns. Markets were also weighing the fiscal outlook in Britain, Japan and France, where heavy borrowing needs and political uncertainty have added to pressure on government debt.
The bond rout comes despite signs of resilience in parts of the global economy. Eurozone manufacturing activity expanded at its fastest pace in more than four years in August, although factory output contracted in Italy and Spain and US manufacturing growth weakened as businesses faced higher costs.
