Global bond markets are undergoing a sharp selloff that has pushed US 30-year Treasury yields to 5.19%, their highest level since the 2007 global financial crisis.
Meanwhile, benchmark 10-year yields climbed to 4.683%, as investors increasingly price in renewed inflation risks tied to higher energy prices amid the US-Iran war and rising bets that the Federal Reserve may raise interest rates rather than cut them.
HSBC warned that the US bond market has entered a “danger zone,” saying the rise in long-term yields risks spilling over into equities and other risk assets. The selloff has also spread across major sovereign debt markets, with Japan’s 30-year bond yields reaching their highest level since 1999 and equivalent UK gilt yields climbing to levels last seen in 1998.
Analysts told Argaam that the sharp rise in global bond yields reflects a broad repricing of inflation, debt, and fiscal policy risks, amid growing concerns that interest rates may remain elevated for longer.
They said rising long-term yields in the US, Japan, and UK are increasingly pressuring equities, credit markets, and global economic growth, particularly as government debt burdens, fiscal deficits, and geopolitical uncertainty continue to rise.
Yields at unsustainable levels
Raed Almomani, Head of Fixed Income at Aram Capital
Raed Almomani, Head of Fixed Income at Aram Capital, said current gains in global bond yields have reached “unsustainable” levels, especially for long-term debt, warning that maintaining such levels for an extended period would increase pressure on governments, companies, and individuals, while weighing on global growth.
Almomani told Argaam that markets had undergone a sharp shift over the past two months. Before the latest geopolitical tensions, investors had largely expected interest rates to trend lower, with bond yields near multi-year lows. However, the outlook reversed rapidly due to rising inflation expectations and mounting political and economic uncertainty.
He said the two main drivers of sovereign bond yields are inflation and the so-called “term premium,” which reflects the additional compensation investors demand for long-term economic, political, and fiscal risks.
According to Almomani, markets had already been witnessing a gradual rise in the term premium before the latest tensions, particularly in the US, driven by concerns over fiscal and monetary policy disputes, widening deficits, and higher government spending. Inflation, however, had remained relatively contained at the time, limiting investor concerns.
Inflation reshapes global rate expectations
Almomani said recent geopolitical developments have reignited global inflation expectations, particularly through higher oil and food prices and renewed supply chain disruptions, causing bond prices to fall and yields to rise.
Markets have shifted from pricing in interest rate cuts to expecting rates to remain elevated for longer, with some investors even beginning to price in additional tightening in certain economies if inflationary pressures persist, he added.
He noted that the current inflation cycle differs from demand-driven inflation, as it is primarily linked to supply-side disruptions, making it more difficult for central banks to manage compared with traditional inflation cycles.
Persistent increases in commodity and energy prices could revive post-pandemic inflationary dynamics and raise fresh questions over whether central banks may once again respond too slowly to inflation pressures, he said.
Almomani added that the biggest concern currently centers on long-term bond yields because governments and corporations rely heavily on them to finance long-term investments and infrastructure projects. US 30-year Treasury yields have already surpassed levels seen before the latest geopolitical tensions, he noted.
Markets reprice inflation and debt risks
Ahmed Azzam, Head of Market Analysis at Equiti Group
Ahmed Azzam, Head of Market Analysis at Equiti Group, said markets have become increasingly sensitive to rising bond yields, not solely because of strong economic growth but due to a combination of inflation pressures, higher oil prices, widening fiscal deficits, and heavy sovereign debt issuance.
Azzam told Argaam that rising yields under normal conditions could be manageable if driven by strong economic growth, noting that the artificial intelligence (AI) boom had been one of the key drivers behind recent market momentum. Current concerns, however, stem from simultaneous increases in real yields and inflation premiums, turning bonds from safe havens into a source of volatility and forcing equities to justify elevated valuations.
He said the impact of higher yields is already feeding into the real economy, with US mortgage rates rising to 6.56% in the week ended May 15 while mortgage applications fell 2.3%, highlighting how quickly higher yields are affecting consumers.
Azzam noted that rising yields are not solely linked to oil and inflation, although geopolitical tensions and energy supply risks have lifted inflation expectations. Five-year breakeven inflation rates reached 2.59% on May 20, reflecting persistent investor concern over inflationary pressures.
The deeper issue, he said, lies in the widening US fiscal deficit and growing financing needs. The Congressional Budget Office expects the federal deficit to reach around $1.9 trillion in fiscal year 2026, equivalent to 5.8% of GDP, widening further to $3.1 trillion by 2036.
Investors are increasingly demanding higher yields not only because of inflation concerns, but also due to fears over the market’s ability to absorb such large volumes of government debt, Azzam added.
Markets are repricing both duration risk and fiscal risk simultaneously, amid declining appetite from some traditional bond buyers and central banks’ reluctance to resume large-scale asset purchases due to inflation sensitivity. These dynamics have increased both the term premium and fiscal premium, making investors less tolerant of expansionary fiscal policies, he said.
Rising debt heightens market sensitivity
Almomani said elevated global debt-to-GDP ratios make current conditions more fragile than in previous historical periods such as the 1980s, despite interest rates having been higher at that time.
Debt-to-GDP ratios in many major economies now exceed 100%, while government borrowing continues to rise, making economies far more sensitive to higher financing costs than in previous decades, he added.
Markets may still witness further short-term technical increases in yields, but such levels are unlikely to prove sustainable over the medium and long term, Almomani said, adding that governments and central banks may eventually be forced to intervene if yields begin threatening economic and financial stability.
Any further rise in yields would gradually slow economic activity and increase borrowing costs for governments, businesses, and consumers, eventually prompting fiscal and monetary authorities to step in, he added.
Japan adds to global concerns
Azzam said current developments represent a broad repricing of interest rates and debt risks globally, not merely a reaction to US Treasury moves.
Japan’s 30-year bond yields have climbed to record highs near 4.20%, while long-dated UK gilt yields have stabilized near 5.7%, he said. The common message from global markets is that investors are demanding higher returns from governments to compensate for fiscal deficits, inflation risks, and political uncertainty.
Japan remains the most sensitive link because rising yields there threaten not only domestic markets but also global capital flows dependent on cheap yen funding, Azzam said.
Higher Japanese yields could undermine the attractiveness of carry trades and encourage Japanese capital to return home, putting pressure on global bonds and equities simultaneously.
Almomani said Japan had long played a key role in financing global investments through carry trades, where institutions borrowed cheaply in yen and reinvested proceeds abroad. Any structural shift in Japanese bond yields could therefore trigger significant reallocations of global capital flows.
He added that the Japanese government and the Bank of Japan may need to intervene more aggressively if current pressures persist, whether through the bond market or the currency market, though such interventions may only provide short-term relief without addressing deeper structural challenges.
UK faces different economic and political challenges, but its global impact remains more limited compared with the US or Japan due to weaker economic growth and continued political instability since Brexit, Almomani said.
Fed faces narrower room for maneuver
Almomani said the US will remain the key driver of global markets, noting that any moves by the Federal Reserve or changes in US monetary policy will reverberate across economies and financial markets worldwide.
He added that the Fed’s ability to intervene has become more complicated than in previous periods due to persistent inflationary pressures, unlike the post-financial crisis era when inflation remained exceptionally low.
Previous quantitative easing programs succeeded partly because inflation was subdued at the time, whereas today’s environment leaves the Fed with less policy flexibility, he said.
Azzam said an intervention similar to those implemented by the Bank of Japan remains theoretically possible, though not the base-case scenario. The Fed would not intervene merely because yields rise, but rather if market moves begin threatening Treasury market functioning, liquidity, or credit stability.
Likely intervention tools would include liquidity and repo facilities rather than a return to large-scale bond-buying programs, especially as inflationary pressures persist and the Fed continues reducing its balance sheet, he added.
Returning to aggressive bond purchases would be far more complicated than in 2020 because inflation itself is now part of the problem behind rising yields, meaning any large intervention could be interpreted as indirect financing of government deficits, Azzam said.
He added that markets may interpret any easing in geopolitical tensions, including the possibility of an end to Iran war, as a factor that could ease inflation concerns and therefore reduce pressure on bond yields.
Markets could also interpret any easing in geopolitical tensions, including a potential end to the Iran conflict, as a factor that may reduce inflation concerns and ease pressure on bond yields, he added.
Yields pressure equities and global credit
Azzam said US 10-year Treasury yields moving into a range of 4.75%-5.0% would represent a major stress test for US equities, particularly technology stocks, due to higher discount rates and the increasing difficulty of justifying elevated valuations.
If 30-year Treasury yields rise above 5.25% and move toward 5.50%, pressure on mortgages, long-term credit markets, and asset valuations would intensify, he added.
Describing the US bond market as entering a “danger zone” is an accurate characterization, Azzam said—not because a financial crisis has already begun, but because yields have reached levels capable of altering the behavior of other markets.
With US 10-year yields approaching 4.7% and 30-year yields above 5.19%, near their highest since 2007, bond yields themselves are becoming competitors to equities and a source of pressure on valuations, financing conditions, and global credit markets, he added.
On corporate bonds, Al-Momani said markets still appear to be underpricing credit risk despite rising sovereign yields, noting that spreads between corporate bonds and government debt remain historically tight.
Markets are currently pricing in continued strong corporate earnings and limited economic disruption despite geopolitical tensions and higher financing costs, a level of optimism he described as potentially excessive.
US high-yield spreads currently stand at around 270 basis points above risk-free yields, among the lowest levels historically and insufficient compensation for current credit risks, he said.
Markets appear overly comfortable with potential risks even though prolonged tensions or a global economic slowdown could later lead to widening credit spreads and mounting pressure on companies, he added.
Almomani said markets are still underestimating credit risks despite the rise in government bond yields, noting that spreads between corporate bonds and sovereign debt remain historically tight.
He added that markets are currently pricing in continued strong corporate earnings and limited economic impact, despite ongoing geopolitical tensions and rising financing costs, warning that such pricing may be overly optimistic.
Spreads on US high-yield bonds currently stand at around 270 basis points above risk-free yields, among the lowest levels historically, offering insufficient compensation for prevailing credit risks.
Markets appear excessively complacent toward potential risks, he said, warning that prolonged geopolitical tensions or a slowdown in the global economy could eventually lead to wider credit spreads and increased pressure on companies.
Almomani added that bond markets have become the most important indicator for the global economy, as rising yields directly affect financing costs, investment activity, and overall economic growth.
Any sharp and sustained disruption in bond markets would therefore have broad repercussions across global markets and financial assets, he said.
Global bond markets are undergoing a sharp selloff that has pushed US 30-year Treasury yields to 5.19%, their highest level since the 2007 global financial crisis.
Meanwhile, benchmark 10-year yields climbed to 4.683%, as investors increasingly price in renewed inflation risks tied to higher energy prices amid the US-Iran war and rising bets that the Federal Reserve may raise interest rates rather than cut them.
HSBC warned that the US bond market has entered a “danger zone,” saying the rise in long-term yields risks spilling over into equities and other risk assets. The selloff has also spread across major sovereign debt markets, with Japan’s 30-year bond yields reaching their highest level since 1999 and equivalent UK gilt yields climbing to levels last seen in 1998.
Analysts told Argaam that the sharp rise in global bond yields reflects a broad repricing of inflation, debt, and fiscal policy risks, amid growing concerns that interest rates may remain elevated for longer.
They said rising long-term yields in the US, Japan, and UK are increasingly pressuring equities, credit markets, and global economic growth, particularly as government debt burdens, fiscal deficits, and geopolitical uncertainty continue to rise.
Yields at unsustainable levels
Raed Almomani, Head of Fixed Income at Aram Capital
Raed Almomani, Head of Fixed Income at Aram Capital, said current gains in global bond yields have reached “unsustainable” levels, especially for long-term debt, warning that maintaining such levels for an extended period would increase pressure on governments, companies, and individuals, while weighing on global growth.
Almomani told Argaam that markets had undergone a sharp shift over the past two months. Before the latest geopolitical tensions, investors had largely expected interest rates to trend lower, with bond yields near multi-year lows. However, the outlook reversed rapidly due to rising inflation expectations and mounting political and economic uncertainty.
He said the two main drivers of sovereign bond yields are inflation and the so-called “term premium,” which reflects the additional compensation investors demand for long-term economic, political, and fiscal risks.
According to Almomani, markets had already been witnessing a gradual rise in the term premium before the latest tensions, particularly in the US, driven by concerns over fiscal and monetary policy disputes, widening deficits, and higher government spending. Inflation, however, had remained relatively contained at the time, limiting investor concerns.
Inflation reshapes global rate expectations
Almomani said recent geopolitical developments have reignited global inflation expectations, particularly through higher oil and food prices and renewed supply chain disruptions, causing bond prices to fall and yields to rise.
Markets have shifted from pricing in interest rate cuts to expecting rates to remain elevated for longer, with some investors even beginning to price in additional tightening in certain economies if inflationary pressures persist, he added.
He noted that the current inflation cycle differs from demand-driven inflation, as it is primarily linked to supply-side disruptions, making it more difficult for central banks to manage compared with traditional inflation cycles.
Persistent increases in commodity and energy prices could revive post-pandemic inflationary dynamics and raise fresh questions over whether central banks may once again respond too slowly to inflation pressures, he said.
Almomani added that the biggest concern currently centers on long-term bond yields because governments and corporations rely heavily on them to finance long-term investments and infrastructure projects. US 30-year Treasury yields have already surpassed levels seen before the latest geopolitical tensions, he noted.
Markets reprice inflation and debt risks
Ahmed Azzam, Head of Market Analysis at Equiti Group
Ahmed Azzam, Head of Market Analysis at Equiti Group, said markets have become increasingly sensitive to rising bond yields, not solely because of strong economic growth but due to a combination of inflation pressures, higher oil prices, widening fiscal deficits, and heavy sovereign debt issuance.
Azzam told Argaam that rising yields under normal conditions could be manageable if driven by strong economic growth, noting that the artificial intelligence (AI) boom had been one of the key drivers behind recent market momentum. Current concerns, however, stem from simultaneous increases in real yields and inflation premiums, turning bonds from safe havens into a source of volatility and forcing equities to justify elevated valuations.
He said the impact of higher yields is already feeding into the real economy, with US mortgage rates rising to 6.56% in the week ended May 15 while mortgage applications fell 2.3%, highlighting how quickly higher yields are affecting consumers.
Azzam noted that rising yields are not solely linked to oil and inflation, although geopolitical tensions and energy supply risks have lifted inflation expectations. Five-year breakeven inflation rates reached 2.59% on May 20, reflecting persistent investor concern over inflationary pressures.
The deeper issue, he said, lies in the widening US fiscal deficit and growing financing needs. The Congressional Budget Office expects the federal deficit to reach around $1.9 trillion in fiscal year 2026, equivalent to 5.8% of GDP, widening further to $3.1 trillion by 2036.
Investors are increasingly demanding higher yields not only because of inflation concerns, but also due to fears over the market’s ability to absorb such large volumes of government debt, Azzam added.
Markets are repricing both duration risk and fiscal risk simultaneously, amid declining appetite from some traditional bond buyers and central banks’ reluctance to resume large-scale asset purchases due to inflation sensitivity. These dynamics have increased both the term premium and fiscal premium, making investors less tolerant of expansionary fiscal policies, he said.
Rising debt heightens market sensitivity
Almomani said elevated global debt-to-GDP ratios make current conditions more fragile than in previous historical periods such as the 1980s, despite interest rates having been higher at that time.
Debt-to-GDP ratios in many major economies now exceed 100%, while government borrowing continues to rise, making economies far more sensitive to higher financing costs than in previous decades, he added.
Markets may still witness further short-term technical increases in yields, but such levels are unlikely to prove sustainable over the medium and long term, Almomani said, adding that governments and central banks may eventually be forced to intervene if yields begin threatening economic and financial stability.
Any further rise in yields would gradually slow economic activity and increase borrowing costs for governments, businesses, and consumers, eventually prompting fiscal and monetary authorities to step in, he added.
Japan adds to global concerns
Azzam said current developments represent a broad repricing of interest rates and debt risks globally, not merely a reaction to US Treasury moves.
Japan’s 30-year bond yields have climbed to record highs near 4.20%, while long-dated UK gilt yields have stabilized near 5.7%, he said. The common message from global markets is that investors are demanding higher returns from governments to compensate for fiscal deficits, inflation risks, and political uncertainty.
Japan remains the most sensitive link because rising yields there threaten not only domestic markets but also global capital flows dependent on cheap yen funding, Azzam said.
Higher Japanese yields could undermine the attractiveness of carry trades and encourage Japanese capital to return home, putting pressure on global bonds and equities simultaneously.
Almomani said Japan had long played a key role in financing global investments through carry trades, where institutions borrowed cheaply in yen and reinvested proceeds abroad. Any structural shift in Japanese bond yields could therefore trigger significant reallocations of global capital flows.
He added that the Japanese government and the Bank of Japan may need to intervene more aggressively if current pressures persist, whether through the bond market or the currency market, though such interventions may only provide short-term relief without addressing deeper structural challenges.
UK faces different economic and political challenges, but its global impact remains more limited compared with the US or Japan due to weaker economic growth and continued political instability since Brexit, Almomani said.
Fed faces narrower room for maneuver
Almomani said the US will remain the key driver of global markets, noting that any moves by the Federal Reserve or changes in US monetary policy will reverberate across economies and financial markets worldwide.
He added that the Fed’s ability to intervene has become more complicated than in previous periods due to persistent inflationary pressures, unlike the post-financial crisis era when inflation remained exceptionally low.
Previous quantitative easing programs succeeded partly because inflation was subdued at the time, whereas today’s environment leaves the Fed with less policy flexibility, he said.
Azzam said an intervention similar to those implemented by the Bank of Japan remains theoretically possible, though not the base-case scenario. The Fed would not intervene merely because yields rise, but rather if market moves begin threatening Treasury market functioning, liquidity, or credit stability.
Likely intervention tools would include liquidity and repo facilities rather than a return to large-scale bond-buying programs, especially as inflationary pressures persist and the Fed continues reducing its balance sheet, he added.
Returning to aggressive bond purchases would be far more complicated than in 2020 because inflation itself is now part of the problem behind rising yields, meaning any large intervention could be interpreted as indirect financing of government deficits, Azzam said.
He added that markets may interpret any easing in geopolitical tensions, including the possibility of an end to Iran war, as a factor that could ease inflation concerns and therefore reduce pressure on bond yields.
Markets could also interpret any easing in geopolitical tensions, including a potential end to the Iran conflict, as a factor that may reduce inflation concerns and ease pressure on bond yields, he added.
Yields pressure equities and global credit
Azzam said US 10-year Treasury yields moving into a range of 4.75%-5.0% would represent a major stress test for US equities, particularly technology stocks, due to higher discount rates and the increasing difficulty of justifying elevated valuations.
If 30-year Treasury yields rise above 5.25% and move toward 5.50%, pressure on mortgages, long-term credit markets, and asset valuations would intensify, he added.
Describing the US bond market as entering a “danger zone” is an accurate characterization, Azzam said—not because a financial crisis has already begun, but because yields have reached levels capable of altering the behavior of other markets.
With US 10-year yields approaching 4.7% and 30-year yields above 5.19%, near their highest since 2007, bond yields themselves are becoming competitors to equities and a source of pressure on valuations, financing conditions, and global credit markets, he added.
On corporate bonds, Al-Momani said markets still appear to be underpricing credit risk despite rising sovereign yields, noting that spreads between corporate bonds and government debt remain historically tight.
Markets are currently pricing in continued strong corporate earnings and limited economic disruption despite geopolitical tensions and higher financing costs, a level of optimism he described as potentially excessive.
US high-yield spreads currently stand at around 270 basis points above risk-free yields, among the lowest levels historically and insufficient compensation for current credit risks, he said.
Markets appear overly comfortable with potential risks even though prolonged tensions or a global economic slowdown could later lead to widening credit spreads and mounting pressure on companies, he added.
Almomani said markets are still underestimating credit risks despite the rise in government bond yields, noting that spreads between corporate bonds and sovereign debt remain historically tight.
He added that markets are currently pricing in continued strong corporate earnings and limited economic impact, despite ongoing geopolitical tensions and rising financing costs, warning that such pricing may be overly optimistic.
Spreads on US high-yield bonds currently stand at around 270 basis points above risk-free yields, among the lowest levels historically, offering insufficient compensation for prevailing credit risks.
Markets appear excessively complacent toward potential risks, he said, warning that prolonged geopolitical tensions or a slowdown in the global economy could eventually lead to wider credit spreads and increased pressure on companies.
Almomani added that bond markets have become the most important indicator for the global economy, as rising yields directly affect financing costs, investment activity, and overall economic growth.
Any sharp and sustained disruption in bond markets would therefore have broad repercussions across global markets and financial assets, he said.
