The global government bond sell-off deepened on Tuesday, with yields from Japan to the U.S. hitting new highs as renewed fighting in the Middle East lifted oil prices and investors worried about inflation and braced for a slew of interest rate hikes.
Japan's 10-year benchmark hit 3% for the first time in a generation.
The 10-year U.S. Treasury yield, a benchmark for prices across asset classes, has broken resistance at 4.75% to stand at 4.78% – its highest since early 2025.
Futures for French and German debt extended selling that drove yields to 15-year highs and the rise in Australia's 10-year yield was the sharpest for five months.
"I think there is now something of a sense of resignation – tinged with helplessness – about rising interest rates," said Ryutaro Kimura, a senior strategist at BNP Asset Management in Tokyo, of the march upward in Japanese borrowing costs, which for years have been such a reliable anchor for world markets.
Higher oil prices and rising U.S.-Iran tensions are stoking worries about inflation, which is negative for bonds, just as Federal Reserve (Fed) Chair Kevin Warsh has reset expectations for the rate outlook.
At the same time, skyrocketing sovereign borrowing has investors starting to demand higher premiums for lending.
At 3%, Japan's 10-year borrowing cost now sits at the government's assumed long-run funding cost, so rises mean real pressure on sovereign finances already strained by Prime Minister Sanae Takaichi's spend-to-grow agenda.
In stocks, U.S. futures steadied and European futures dipped after Wall Street notched modest Monday falls, and the mood was soured ahead of Friday's U.S. jobs data, which could pave the way to a rate-hiking cycle starting as soon as this month.
Markets are pricing an interest rate hike in New Zealand on Wednesday and an increase in Europe next week. Hikes this month in the U.S. and Japan are at better-than-even odds.
"I think really most of this (bond) sell-off has been a reassessment of Fed policy," said Andrew Lilley, chief rates strategist at Barrenjoey, an investment bank in Sydney.
"I think the Fed hikes in September, and I think it's the beginning of the three-rate hike cycle at minimum."
Shein fades, Brent tops $91 a barrel
Japan's Nikkei struggled for headway, and the rates selloff knocked equities sensitive to housing in Australia, such as banks and retailers, on fears a nascent downturn in the real estate market runs further with every rise in borrowing costs.
Hong Kong's Hang Seng fell 1%, with the weak tone set by the lackluster debut of clothing giant Shein Global. Shein shares slid to leave its market value less than a quarter of where it peaked in 2022.
Conflict in the Middle East, meanwhile, has left the energy outlook precarious as Brent futures topped $91 a barrel and Europe's benchmark gas price finished summer at a 3-1/2-year high, with stockpiles at record seasonal lows.
U.S. President Donald Trump has threatened further strikes against Iran after the first exchange of fire in a month, while stepped-up fighting between Russia and Ukraine has wheat prices trading close to three-year highs.
Because the rise in borrowing costs has been global, it has offered only limited support to the U.S. dollar.
The euro was steady at $1.1619 and the yen at $159.76 to the dollar. Preliminary inflation figures are due in Europe later on Tuesday.