The global government bond sell-off deepened on Tuesday, with yields from Japan to the U.S. hitting new highs and equities easing as investors fretted that energy-driven inflation would force central bankers to hike interest rates.
The latest bout of fighting between the U.S. and Iran has pushed oil prices higher, stoking the fears of tighter monetary policy that could weigh on economic growth.
Heavy selling sent the interest rate on 30-year U.K. government bonds to the highest since 1998, while the 10-year yield surged to a level not seen since the 2008 global financial crisis.
Japan's 10-year bond yield touched a 30-year high of 3%, reflecting worries about plans for massive government spending.
The yield on the 30-year U.S. Treasury bond stood at 5.27%, not far from levels last seen in 2007, while the 10-year yield rose to its highest level since January 2025.
"The bond sell-off has ... been a global affair," said Deutsche Bank's Jim Reid.
He said the "main culprit was the weekend escalation in the Middle East that saw the U.S. and Iran exchange strikes for the first time since late July."
European stocks tumbled, with Frankfurt shedding more than 1% and London also falling as trading resumed after a public holiday.
Official data showed that eurozone inflation hit a three-year high at 3.3% in August, cementing expectations that the European Central Bank (ECB) would raise interest rates next week.
Oil prices jumped around 2% on Tuesday after the U.S. and Iran traded fire for the first time in weeks, and U.S. President Donald Trump threatened to hit Iran "hard."
After six months of war, the conflict remains at an impasse, with Tehran keeping the strategic Strait of Hormuz closed and Washington maintaining a counter-blockade of Iranian ports.
"With Trump now threatening further action against Iran, including against Kharg Island, Iran's key oil export hub, supply worries are once again front and center," said Susannah Streeter, chief investment strategist at Wealth Club.
Traders are now awaiting key economic data ahead of the Federal Reserve's (Fed) policy meeting on Sept. 16.
The jobs and consumer price index reports could play a major role in whether the bank lifts rates, with bets on an increase surging after Fed Chair Kevin Warsh gave a hawkish speech on Friday.
Asian stock markets on Tuesday followed Wall Street lower, with Tokyo, Hong Kong and Shanghai all falling.
The yen weakened against the dollar despite U.S. Treasury Secretary Scott Bessent telling CNBC he expected Japan to support the currency, which has lost half the gains made in a historic joint intervention after it hit a 40-year low.
The comments were seen as a signal for the Bank of Japan (BOJ) to tighten monetary policy when it meets this month.
"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.
Markets are also pricing an interest rate hike in New Zealand on Wednesday.
"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."
Japan's Nikkei struggled for headway, and the rates sell-off 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 3.5-year high, with stockpiles at record seasonal lows.
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 also pushed 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.
