Global bond market sell-off deepens as US-Iran war fears push yields to multi-year highs

The global bond market is experiencing a severe sell-off, sending yields surging to multi-year highs as surging inflation fears tied to the US-Iran war dismantle investor hopes for central bank interest rate cuts. The confluence of geopolitical distress, rising energy prices, and structural fiscal challenges has fully reversed early-2026 AI-driven market optimism.

The 10-year US Treasury yield was highest in around a year on Friday, 4.595 per cent, the steepest jump. This comes two days after the government sold the 30-year bond at its highest since 2007, 5.127 per cent, as traders anticipated the Federal Reserve would be forced to hike rates to rein in inflationary pressures stemming from energy shocks. Benchmark Treasury yields are ​the government security most influential to mortgage rates.

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What is driving the fear of the bond market?

Traders have completely unwound earlier bets that central banks like the Federal Reserve would aggressively cut interest rates in 2026. Instead, fixed-income markets are now actively pricing in a nearly 50 per cent probability that the Fed will hike interest rates later this year or in early 2027 to curb the war-driven inflation spike. The war in Iran is likely to continue to stoke higher energy prices. Investors said that the broad sell-off was the result of the US-China summit, which had no news on the West Asia situation, following which Brent Crude rose 4 per cent to exceed $109 a barrel. The soaring inflation expectations are prompting investors to look at the sovereign debt "death spiral". Further political instability in the UK and red-hot wholesale inflation made analysts predict the return of “bond vigilantes” investors who punish the government's high spending with steeper yields. The panic isn't just about bonds losing value; it is a structural "regime shift" where the cost of borrowing money globally is rapidly resetting higher. The narrative has completely pivoted from "When will the Fed cut rates?" to "How high will they have to raise them?".

What about the spillover effect on global equities?

As bond prices and yields move in opposite directions. The heavy selling of government debt has pushed the borrowing cost to severe thresholds. This has, in return, halted the momentum of the stock market. Major global stock indexes S&P 500 and Nasdaq were down ​between 1 per cent and 2 per cent, a day after the conclusion of US-China summit. Typically, the market algorithm is that when the stock falls, the bond rises, but now that relationship is broken.

“There’s a realisation that the market had gotten way ahead of itself," said Kenny Polcari, chief market strategist at Slatestone Wealth Management in Jupiter, Florida. "It wasn’t paying enough attention to what the bond market and economic data are ​telling it. It was caught up in this momentum AI trade.” Next week, another test is pending as a 20-year US Treasury action is scheduled.