Bond Yields Surge to New Highs as Energy Prices Fuel Inflation Fears

Global bond yields have surged to new highs as rising energy prices fuel inflation fears and investors anticipate interest rate hikes. Japan's 10-year benchmark bond has reached a generation-high of 3%, while the 10-year US Treasury yield has broken resistance at 4.75% to stand at 4.78%, its highest since early 2025.

The global sell-off in bonds has been driven by concerns over inflation, which is negative for bonds. Higher oil prices and rising US-Iran tensions are stoking worries about inflation, while skyrocketing sovereign borrowing has investors demanding higher premiums for lending.

Ryutaro Kimura, a senior strategist at BNP Asset Management in Tokyo, noted that there is now 'something of a sense of resignation, tinged with helplessness, about rising interest rates.' The rise in Japan's 10-year borrowing cost to 3% means real pressure on sovereign finances already strained by Prime Minister Sanae Takaichi's spend-to-grow agenda.

Markets are pricing an interest rate hike in New Zealand this week and an increase in Europe next week. Hikes this month in the US and Japan are at better-than-even odds, with some predicting a three-rate hike cycle starting as soon as this month.