Global bond yields hit multi-decade highs as governments pay the price for U.S.-Iran stalemate

A global sell-off of government bonds gripped markets Tuesday morning, sending borrowing costs to multi-decade highs, as hopes for an end to hostilities it the Middle East rapidly faded.

It comes after a window for a new deal to be reached between the U.S. and Iran closed without a breakthrough, reigniting concerns about inflationary pressure.

On Monday, U.S. President Donald Trump ruled out extending a ceasefire between Washington and Tehran, while Iran issued fresh threats of military escalation. Both sides have rejected further peace talks.

Overnight, a cargo vessel was struck by a projectile as it transited the Strait of Hormuz — a waterway that acts as a critical shipping route for global trade and has become a key sticking point in negotiations. The effective closure of the strait throughout the nearly six-month war has seen the cost of energy and other vital commodities rise.

Oil prices extended their rally on Tuesday, with global benchmark Brent crude oil futures hovering above the $90-a-barrel mark.

At 4:16 a.m. ET, yields on U.S. 30-year Treasurys were up almost 2 basis points to 5.3275%, the highest level since 2002. The yield on 20-year Treasury notes hit a post-2006 high, while the benchmark 10-year Treasury yield was last seen at 4.74%, its highest since 2007.

U.S. Treasury yields

Bond yields and prices move in opposite directions, with one basis point equaling 0.01%, or 1/100th of 1%.

Downward pressure was also seen on the bonds issued by governments beyond the U.S., with yields hitting or nearing multi-decade highs in various markets.

Germany's benchmark 10-year bund yield was last seen trading at a 15-year high, while its French counterpart reached its highest yield since 2008. Japan's 10-year bond yield rose to 2.954%, topping the 40-year high seen in the spring. Yields also spiked across the curve on British, Italian, Swiss and Canadian government bonds.

International government bond yields

In a Tuesday morning note, Dan Coatsworth, head of markets at AJ Bell, said that unsuccessful efforts to bring an end to the war have put inflation fears and potential interest rate hikes front of mind for investors.

But he added: "Rising long-dated bond yields are not driven solely by expectations of higher interest rates and inflation fears. They can also reflect concerns around high levels of government borrowing and investors demanding greater compensation for the risks of holding long-dated government bonds."

Deutsche Bank's Jim Reid said in a note that there hadn't been a single catalyst for the declines in the bond market over the past 24 hours, "but with few signs of the US and Iran coming to any sort of a deal, that meant investors priced in a more extended closure of the Strait of Hormuz."

"Investors are pricing in a more protracted period of higher oil prices again," he said. "As investor concern mounted about a longer closure for the Strait of Hormuz, that put pressure on fixed income, particularly longer-dated sovereign bonds."