As bond yields surge, investors grow wary of global spending crunch

LONDON — Investors are waking up to the worry that war in Iran may deliver a lasting inflationary shock, with sovereign bond yields racing to decade highs and threatening a severe hit to the spending power of governments, businesses and households.

The average rate at which governments in the Group of Seven (G7) richest nations pay to borrow for 10 years is approaching 4%, up from around 3.2% before the war started in late February. The yield on the 10-year US Treasury note is around 4.6%, its highest level in more than a year and a source of concern among investors given its role as the key borrowing rate in the world’s largest economy.

The risk of longer-lasting inflation has ignited concern that central banks will need to quickly raise interest rates, potentially amplifying economic fallout — and putting G7 governments in a tight spot in terms of policy.

“Yields are going to go higher until something breaks. The wild part is Iran knows this,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management in Philadelphia. “I would say we’re in that range right now where the equity market is paying attention to bonds. The closer we get to 5%, the more that pressure builds.”

BIG MOVE IN YIELDS
Benchmark 10-year US Treasury yields jumped as much as 3.6 basis points (bps) to their highest since February 2025 at 4.631%, before moderating to trade at 4.6%. The 30-year yield, which directly impacts mortgages, rose to a one-year high of 5.159%. Yields rise when bond prices fall.

Wall Street’s main stock indexes were modestly lower on Monday after declining on Friday, with some investors warning that record-high US stock markets have not yet priced in the risk of rising inflation.

Markets were pricing in a roughly 50% chance the US Federal Reserve will raise rates by December, marking a reversal from expectations prior to the Iran war, which factored in at least one rate cut this year.

US overnight funding markets remained stable on Monday, displaying little of the stress that pushed Treasury yields sharply higher late last week.

The tri-party general collateral rate, which measures the cost of borrowing short-term cash using Treasuries as collateral, was quoted at 3.55%, little changed from Friday.

A recent drop in Treasury bill issuance, combined with the Federal Reserve’s reserve management purchases, has reduced bill supply to early-May lows, boosting bank reserves and leaving short-end collateral scarce amid ample system liquidity.

G7 FINANCE LEADERS MEET IN PARIS
Market ructions are top of mind for G7 finance ministers who met in Paris on Monday.

“We are no longer in a period where public debt is not a subject,” French Finance Minister Roland Lescure told reporters as he arrived at the meeting.

The question of what policymakers can do in an age of surging government debt alongside rising bond yields is one that markets have taken up in recent days.

“If the administration becomes uncomfortable with yields, they have a handful of levers they can pull,” said Eric Winograd, chief US economist at AllianceBernstein in New York. “One is fiscal commitment. So you can reinforce the idea of fiscal credibility.”

Winograd added, “The central bank can try to do something. In the US there is a new Fed chair coming in and another policy meeting next month. If you want to bring Treasury yields down, you should come in and be hawkish,” potentially easing market nerves and making rate increases unnecessary.

DIFFICULT MATH FOR GOVERNMENTS
The pattern is the same across major bond markets, from the euro zone to Britain and Japan, where yields are at record highs. Central banks set interest rates, but bond markets set the rate at which companies, individuals and governments can borrow, meaning that anything from a car loan to financing for a multi-billion-dollar data center is affected.

Kenneth Broux, head of corporate research, FX and rates at Societe Generale, said to stop what he called a “slow-motion crash” in the bond market would require a retreat in oil prices, recession fears growing enough to spark a safe-haven rush to bonds, or prices falling low enough to attract buyers.

Yields on the 30-year Japanese government bond (JGB) jumped to their highest on record at 4.2% while 10-year yields touched their highest since October 1996 at 2.8%. Japan plans to issue fresh debt as part of funding for a planned extra budget to cushion the economic blow from the war.

Euro zone bond yields edged lower in afternoon trading in Europe, but were still at their highest in years. German 10-year Bund yields, the benchmark for the currency bloc, hit a 15-year top of 3.193%, up 10 bps in a week.

Yields on bonds issued by more indebted countries such as Italy and France have risen even more sharply. Ten-year Italian government borrowing costs are now at 3.9%, up 12 bps in a week, while French yields have risen 26 bps. — Reuters