Global government bonds were sold off

On September 1, the 10-year Japanese government bond yield hit 3% for the first time since 1996, amid a widespread global bond sell-off. When bonds are sold off, increased supply causes prices to fall and pushes yields up, as the two indexes move in opposite directions.

In the US, the yield on 10-year Treasury bonds – an important reference level for global asset prices, surpassed the 4.75% resistance level, reaching 4.78%, the highest since early 2025. According to CNBCtraders are evaluating developments in the Middle East, after the US launched new air strikes against Iran.

In Europe, French and German government bond futures continue to be sold off, despite yields reaching a 15-year high. Australian 10-year bond yields also recorded the strongest increase in 5 months.

The wave of global government bond sell-offs occurred due to the return of US-Iran tensions, causing oil prices to increase. Brent oil futures prices have exceeded 91 USD a barrel, and Europe’s benchmark gas prices are also at their highest level in 3.5 years, in the context of reserves falling to a record seasonal low.

Escalating energy prices increase concerns about inflation, an unfavorable factor for bonds. Mr. Tai Hui, chief Asia-Pacific market strategist of JP Morgan Asset Management (Hong Kong), said that the tension in the Middle East has the risk of pushing energy prices higher entering the fourth quarter.

“Reducing inventories and increasing fuel demand as the Northern Hemisphere enters winter means the direct impact on inflation will tend to increase,” he said.

At the same time, US Federal Reserve (Fed) Chairman Kevin Warsh affirmed that controlling inflation is the central bank’s main focus, causing the market to predict a higher probability of the Fed raising interest rates.

“I think much of this bond sell-off actually stems from the market reassessing Fed policy,” said Andrew Lilley, chief interest rate strategist at investment bank Barrenjoey in Sydney. According to him, the Fed will raise interest rates in September, starting a cycle of at least three interest rate increases.

In addition, the skyrocketing scale of government debt also caused investors to begin demanding higher yields to compensate for risks. “Yields are rising due to growing expectations of rising interest rates and concerns about fiscal sustainability in major developed economies,” Shigeto Nagai, Head of Japan Economics at Oxford Economics, explained.

With a 10-year yield reaching 3%, Japan’s borrowing costs are now on par with the government’s assumed long-term funding costs. Therefore, a continued rise in yields will put real pressure on public finances, which are already under pressure from Prime Minister Sanae Takaichi’s program to increase spending to boost growth.

“I think there’s now a sentiment of almost resignation, mixed with helplessness as yields continue to rise,” said Ryutaro Kimura, senior strategist at BNP Asset Management in Tokyo.