Global bond markets plummet! The probability of the Federal Reserve raising interest rates in October rises to 50%, U.S. Treasury yields hit new highs, and UK bonds break 5% for the first time in 8 years.

Ask AI · How Middle East conflict is pushing up global bond market yields?

Global bond markets fell on Friday. Bond traders increased their bets on further rate hikes by the Federal Reserve, with the probability of the Fed raising rates by October now at 50%. The yield on the 10-year U.S. Treasury hit its highest level since August. The yield on the UK 10-year gilt rose by 16 basis points to 5% for the first time since 2008. Bond markets in Germany, Canada, Norway, and others also saw sell-offs. Media reports said the market is worried that if the Middle East war continues for an extended period, it could push up global inflation.

U.S. Treasuries sold off

On Friday, following news that the U.S. military is sending additional troops to the Middle East, a wave of selling hit the U.S. Treasury market with a size of $3.1 trillion. Yields on U.S. Treasuries across maturities generally rose by 9 to 13 basis points, with the 2-year U.S. Treasury leading the move. The 2-year U.S. Treasury is most sensitive to monetary policy. The yield on the 5-year U.S. Treasury first broke above 4% since July. The benchmark 10-year U.S. Treasury yield rose by more than 11 basis points to 4.375%, the highest level since August.

The money market has raised its bets on the Federal Reserve’s rate hikes this year to a 50% probability of reaching that level by October, abandoning the earlier expectation before the outbreak of the Iran war on February 28—that time the market believed there would be two rate cuts of 25 basis points each.

There are also reports that the European Central Bank may begin discussing rate hikes in April and could take tightening action in June.

TD Securities U.S. rates strategist Gennadiy Goldberg said:

“As the Iran conflict keeps escalating and dragging on, it seems the U.S. Treasury market has started to worry that inflation pressures will rise further.”

“The market is no longer pricing in rate cuts for 2026. Instead, it is now pricing in some probability of rate hikes, and that is driving U.S. Treasury yields significantly higher.”

UK 10-year gilt hits 5% for first time since 2008

Euro-zone sovereign bond yields rose for a third consecutive day on Friday, after a major sell-off the day before. On Friday, the UK bond market continued to swing violently. The 10-year gilt—the benchmark for UK borrowing costs—surged to 5%, the first time it has touched that level since the 2008 financial crisis.

Media said this is a heavy signal for a country already facing fiscal fragility. At the same time, Prime Minister Keir Starmer also faces leadership challenges within the governing Labour Party. James Athey of Marlborough Investment Management said the shadow cast by the failed 2022 “mini-budget” and signals that the Bank of England may raise rates have put the UK in a “punishment zone.”

He said:

“It’s been a very turbulent week. As everyone has already become familiar with, the performance of UK gilts has been worse than most other assets.”

On Friday, the UK 10-year gilt yield rose by 16 basis points. Volatility was even more pronounced in shorter-dated bonds. In just two days, the 2-year yield increased by nearly 50 basis points—0.5 percentage points. During that day’s trading, the 2-year yield rose again by 19 basis points to 4.59%.

In terms of how quickly the move is happening, it is surprising how fast the market has turned. Just three weeks ago, markets widely expected the Bank of England to cut rates. Now, the money market has started betting on three rate hikes of 25 basis points each this year, and the probability of a fourth hike is also close to a coin flip.

Analysis says the UK is so fragile because it is highly dependent on energy imports, inflation is sticky, and it relies on external financing—making it more vulnerable to rapid shifts in bond-market sentiment.

Aberdeen Investment director Matthew Amis told the media:

“If the Middle East conflict hadn’t happened, in another scenario the Bank of England would already have started cutting rates, and UK gilt yields might have fallen back toward 4%. That trend would be supported by weaker wage data. This is precisely what highlights the fragility of the UK economy right now.”

For the UK government, the pressure from this round of yield increases is even greater than in 2008, because the current share of debt relative to the size of the economy is already twice what it was then. Worse still, data released on Friday showed that borrowing last month reached £14.3 billion, above market expectations.

Germany, Canada, Norway, Australia and other countries’ bond markets plunged

In addition, Germany’s 10-year sovereign bond yield has surged to the highest level since the 2011 euro-zone debt crisis, mainly because geopolitical tensions have hit the energy market. Germany’s 2-year sovereign bond yield rose by 3.2 basis points to 2.61% on the day, and has risen by about 59 basis points so far this month.

Previously, the European Central Bank decided to keep rates unchanged and acknowledged that energy prices are rising amid ongoing geopolitical tensions. Investors are watching developments cautiously. The ECB removed the earlier wording that it was “in a good position” and reiterated that it will ensure medium-term inflation remains stable at 2%, incorporating risks of stagflation into its economic forecasts. RaboResearch has added, in its forecasts, a scenario in which the Bank of England hikes rates as early as April, while also expecting the ECB may hike rates in April and take further action during the summer.

With Germany’s 10-year sovereign bond yield—an important benchmark for euro-area borrowing costs—rising to 3.025%, up 7 basis points. This upward move reflects that, while bond prices are falling, investors’ concerns about the outlook for the market are intensifying.

Meanwhile, Canada’s 10-year sovereign bond yield rose to more than 3.48%, driven by the persistence of global inflation pressures and a shift in North American monetary policy stances toward hawkishness. Norway’s 10-year sovereign bond yield rose to 4.48%, the highest level since November 2008. Over the past four weeks, Norway’s 10-year sovereign bond yield has cumulatively risen by 23.20 basis points.

Australia’s 10-year sovereign bond yield rose to the highest level since 2011, but bigger volatility showed up in the front end: the 2-year yield has risen to 4.69%. Overnight index swaps show the market expects Australia to hike rates further by 70 basis points this year; after the cumulative 50 basis points already delivered in February and March.

Investec economist Sandra Horsfield said:

“Central banks have already realized that treating the energy shock as a temporary risk is very dangerous, and there are also risks of both direct and indirect impacts. Therefore, what we are seeing are more hawkish policy statements.”