Yields on government bonds are around multi-decade highs as investors cast a wary eye on fiscal deficits and the renewed fighting in the Middle East

A storm is gathering in bond markets across the globe as yields on government debt are in many cases near multi-decade highs.

High and rising government debt levels pose a problem for bond markets for which no solution seems imminent. The rising deficits, meanwhile, are colliding with diminished demand for government debt.

On top of this, renewed fighting in the Middle East earlier this week pushed oil prices higher and elicited concerns of what one Wall Street analyst called an “inflation monster.”

RT takes a look at the rumbling in global bond markets and what to look for in the coming days and weeks.

What happened and what caused it

After fighting between the US and Iran restarted earlier this week, oil jumped more than $4 a barrel on Tuesday, settling at a five-week high of $94.65 per barrel Brent. Prices retreated somewhat later in the week, but oil is still set for a roughly 9% gain on the week. US diesel futures, meanwhile, surged to a 52-month high earlier in the week.

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Bonds sold off sharply across the board on both Tuesday and Wednesday before stabilizing on Thursday.

More broadly, the volatility comes as major economies have flooded the market with debt, demand for which has been tepid. In particular, the pool of price-insensitive institutional buyers is shrinking in what is a larger structural shift. All things being equal, investors want higher yields to absorb the quantity and also to protect themselves against rising inflationary risks.

Perhaps most concerning are what seem to be permanently expanding budget deficits in numerous countries, particularly given the apparent lack of political will to stem the profligacy. The US recently passed the $40 trillion debt mark with no sign of slowing down. Debt as a share of economic output is at or above 100% across the G7, except Germany, which seems determined to catch up.

Heavy borrowing by AI companies – which are in many cases unable to fund growth out of cash flow – is also contributing to the rising rates. According to a blog post by the European Central Bank, US tech giants are flooding European bond markets to fund AI investment, potentially reaching $1 trillion by 2028, thus crowding out other borrowers – including governments.

Meanwhile, higher energy prices are having a direct feed-through to inflation. Consumer prices in the Eurozone climbed 3.3% in August year-on-year, the fastest pace of inflation in nearly three years. The recent move higher in oil prices will only make this worse.

What it all adds up to is that yields on government bonds across major economies are in many cases trading at levels not seen in years or even decades.

• The UK’s 30-year bond yield hit its highest level since 1998.

• Japan’s 10-year yield has broken through the 3% mark for the first time in three decades.

• Yields in Germany and France are also trading at their highest levels in a decade.

• The yield on the US 10-year, the single most important interest rate in the world, is at a level last seen in 2023.

“It’s becoming harder and harder to disentangle” all the factors behind the moves in bond markets, said Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle. “The only thing we can say right now is that they’re all pointing in the same direction, and that’s in the direction of higher rates, and they’re doing it globally.”

10Y Government Bond Yields

10y government bond yields of select major economies

Source: Bloomberg, Banque de France and LSEG Datastream

War and the bond market

US yields are currently sitting at or near multi-decade highs across much of the curve and have edged higher since hostilities with Iran resumed. With the war now in its seventh month, many analysts are wondering whether the bond market might end up being the major constraint on US military ambitions.

It wouldn’t be the first time Treasures put a damper on moves by the administration of US President Donald Trump.

A few months into his new term, Trump introduced his Liberation Day tariffs, thus opening a trade war against the whole world from the White House lawn. It would take exactly three trading days for the 10-year yield to chalk up a gain of around 50 basis points, putting it on pace for its biggest weekly rise in a quarter century. The administration beat a humiliating retreat by canceling or postponing most of the tariffs.

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This could prove to be America’s Achilles’ heel in the Iran war

Many analysts believe the specter of inflation, and downstream from that, Treasury market turbulence, has already limited the scope of what Washington can do in the Middle East. With yields rising aggressively now, the administration may well end up being even more constrained.

Meanwhile, the worsening inflation climate is not lost on the Fed. New Fed Chairman Kevin Warsh delivered a hawkish message at last week’s Jackson Hole Symposium – an implicit acknowledgement of the war-related risks. The market is now pricing in a 70% chance of a rate hike at the Fed’s next meeting in September.

A hike would push Treasury yields higher, but mostly at the short end. This is essentially what the market gave Warsh after Jackson Hole: the 2-year jumped while the long end was much calmer, producing what is called a bear flattening, when short-term yields rise faster than long-term yields. This can be interpreted as a vote of confidence that the Fed is going to deal with inflation.

But if the war in Iran is raging and inflation is surging, a Fed hike might not convince the market. If the Fed hikes and long-term rates rise anyway, it would be a very ominous signal that the central bank might be losing control of the bond market.

France – the new sick man of Europe

France has emerged as the Eurozone’s biggest sovereign debt risk, which means that a problem once confined to the southern periphery of the union has moved to one of the two political pillars of the entire European project.

France’s finances are a mess. The country’s public budget deficit stood at 5.1% of GDP in 2025, while its debt-to-GDP ratios hit 115%. Both figures are well above EU limits and both are highly unusual for a country that is neither at war nor in a deep recession.

France has accumulated more than €3.5 trillion in public debt, which is becoming more expensive to finance as the yields on its bonds have risen dramatically over the past year. As a result, the French 10-year is trading above its Greek and Italian counterparts, a state of affairs that few previously would have imagined.

Meanwhile, Paris has committed to billions in increased defense spending in the coming years. A major update to the country’s defense budget authorizing an additional €36 billion for 2026–2030 was signed off on by lawmakers in June.

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Where Europe and the US meet

France, with its political deadlock and fiscal profligacy, may have emerged as the most acute source of potential stress in the EU, but the trend of higher yields is visible across the bloc. Germ...

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