Global bond sell-off worsens as U.S. 2-year yield touches highest level since 2025

Investing.com - A relentless global bond market sell-off accelerated on Tuesday, driving sovereign borrowing costs across North America, Europe, and Asia to generational highs as escalating military conflict in the Middle East and persistent central bank hawkishness combined to trigger a historic retreat from fixed-income assets. In the United States, benchmark Treasury yields surged across the curve as fixed-income desks aggressively re-priced federal interest rate expectations and inflation risks. The Two-Year Treasury Yield hovered at 4.354%, touching its highest level since 2025 as policy-sensitive paper bore the brunt of hawkish Fed rate pricing. The 10-Year Treasury Yield advanced to 4.780%, also reaching its highest point since 2025 as duration paper faced heavy selling pressure. The 30-Year Treasury Yield climbed to 5.273%, pushing to an over one-week high as long-end term premia expanded. The sharp U.S. yield spike mirrored widespread selling across international debt markets. In Europe, Germany's two-year Schatz yield rose for a fifth consecutive session to 2.936%, its highest level since July 2024. Germany's 10-year Bund yield jumped to 3.352%, while the 30-year yield touched 3.841%, both marking their highest levels since 2011. France's 10-year OAT yield escalated to 4.15%, its highest since November 2008. In Asia, Japan's benchmark 10-year government bond yield spiked to 3.000%, its highest level since late 1996, while the two-year JGB yield reached a record high of 1.800%. The global wave of bond selling reflects a profound shift in market dynamics. Rather than acting as a traditional safe haven during geopolitical crises, sovereign debt is being heavily sold as traders price in prolonged stagflation risks driven by surging energy costs and persistent inflation. Direct U.S.-Iranian military strikes in the Persian Gulf, including missile exchanges targeting sites on Larak Island and retaliatory strikes on U.S. bases in Jordan, have driven crude prices past $90 a barrel. Because energy costs feed directly into headline consumer prices, fixed-income investors are demanding significantly higher term premia to hold long-duration debt, fearing that inflation will remain elevated well into 2027. The sell-off gathered momentum following Federal Reserve Chair Kevin Warsh's address at Jackson Hole, where he signaled that central bankers still have work to do to tame inflation. Money markets swiftly re-priced the odds of a 25-basis-point Fed rate hike in September to 60%. Across the Atlantic, the European Central Bank was widely expected to deliver another rate hike on September 10, while the Bank of Japan faced pressure to tighten monetary settings at its upcoming meeting. Governments worldwide are issuing record volumes of debt to fund defense expansion, energy transition projects, and budget deficits. Japan's record 143 trillion yen fiscal budget request and France's mounting public debt burdens were highlighted as examples. With central banks actively shrinking their balance sheets through quantitative tightening, private markets are struggling to absorb the increased supply without forcing yields sharply higher. With global yield curves flattening and steepening erratically across regions, bond desks are watching upcoming macroeconomic releases to gauge the next direction of central bank policy. Euro zone August CPI data and U.S. employment indicators, including JOLTS job openings and nonfarm payrolls, are expected to provide important clues ahead of the Federal Reserve's September 16 rate decision.