Europe Joins Global Bond Selloff as Middle East Hostilities Lift Oil Prices -- Update

By Emese Bartha

U.S. Treasury and eurozone government bond yields rose further on Wednesday, following similar moves in Asian bonds, as renewed hostilities between the U.S. and Iran pushed oil prices higher, adding to inflation fears and prospects of a Federal Reserve interest-rate hike.

Yields again hit multiyear highs as a result. Ten-year Treasury yields rose to their highest in nearly three years; German 10-year Bund yields reached their highest since 2011; and yields on U.K. 10-year and 30-year government bonds, known as gilts, climbed to their highest levels since 2007 and 1998, respectively.

"Historians will point to the fact that September is a traditionally trying month for investors," Richard Hunter, head of markets at Interactive Investor, said in a note. The first trading day of this month "did little to upset that trend as global equities fell and bond yields continued their upward ascent," he said, referring to Tuesday's trade.

The two-year U.S. Treasury yield rose to 4.410%, the highest since January 2025, while the 10-year Treasury yield increased to 4.818%, the highest since November 2023, according to Tradeweb data.

The U.S. and Iran again exchanged fire Tuesday, causing the price of Brent crude oil to rise 0.5% to $95.08.

In European trade, the 10-year German Bund yield rose to a high of 3.395%, while the 10-year U.K. gilt yield hit 5.294% and the 30-year gilt yield reached 5.921%, LSEG data showed. This came after Japan's 10-year government bond yield hit its highest level since September 1996 during Asian trade.

The U.S. dollar also rose, benefiting from higher oil prices both because the U.S. is an oil exporter and because of the currency's safe-haven status. The DXY dollar index, which measures the dollar's value against a basket of currencies, increased to 99.863, its highest in almost three weeks.

The global bond selloff continues on the back of renewed tensions between the U.S. and Iran and rising oil prices as a result, Christian Hantel, portfolio manager at Vontobel, said in a note. Investors also continued to digest Federal Reserve Chairman Kevin Warsh's Jackson Hole speech on Friday, where he warned about inflation risks and reinforced the prospect of higher interest rates, he said.

"Now we are likely to live with higher yields for longer," Hantel said.

U.S. money markets priced a near 70% probability of the Fed raising interest rates at its Sept. 16 meeting, well above a level of around 35% before Warsh's speech, LSEG data showed.

Importantly, however, bond markets aren't in panic mode and are functioning properly, analysts at Allianz Research said.

Renewed tensions in the Middle East since July and destruction of refining capacity in Russia have raised energy costs again, in particular gas prices, leading to higher inflation and central-bank rate-rise expectations. This explains the lion's share of the latest increases in yields, they said.

"Bond markets are still functioning well according to bid-ask spreads or auction demand, but elevated rate levels are rightfully raising debt sustainability concerns," they said.

Fiscal risks and abundant supply on bond markets are other factors which are weighing on bonds.

In the eurozone, demand for bonds will come under intense scrutiny this month as Europeans return from holidays and national debt agencies also resume auctions.

The Investment Institute by UniCredit forecasts gross government bond issuance of 120 billion euros ($139.12 billion) in the eurozone in September, leaving the net supply positive as redemptions will amount to 86 billion euros, fixed income strategist Francesco Maria Di Bella said in a note.

In this context, France's auction of up to 13.5 billion euros in long-end government bonds on Thursday will be particularly closely watched.

The 10-year French OAT-German Bund yield spread rose to 91 basis points Wednesday, the widest since March, before retreating to 88 basis points, according to LSEG data.

Write to Emese Bartha at emese.bartha@wsj.com

(END) Dow Jones Newswires

September 02, 2026 07:09 ET (11:09 GMT)