LONDON, May 29 - Global government bond markets endured a turbulent May as the fallout from the Iran war and shifting economic data fed rapid moves in yields. Traders initially drove longer-term yields to levels not seen for decades on fears inflation could persist and borrowing costs would climb, only for a combination of diplomatic developments and soft economic readings to reverse much of that pressure toward month-end.
Treasury turbulence
The 30-year U.S. Treasury yield surged to about 5.2% on May 20, marking its highest level since 2007 as the conflict rattled the $28 trillion U.S. government bond market. Contributing triggers included signs that peace talks were faltering, which sent oil prices back above $110, and stronger U.S. price data. Those forces together prompted a broad selloff in sovereign debt.
Across markets, British yields climbed to levels not seen in two or three decades, certain Japanese yields reached record highs, and Germany's 10-year yield hit its highest since 2011. "The market's concerned that inflation may be here a bit longer than we had anticipated," said David Zahn, head of European fixed income at Franklin Templeton.
Pullback as risks shifted
Later in May borrowing costs eased as oil prices retreated and reports suggested progress in talks between the U.S. and Iran. Weak economic data in some regions, notably the euro zone, further reduced the immediacy of aggressive central bank tightening. Recent data showed euro zone economic activity contracted at its sharpest rate in two-and-a-half years in May, a development that eroded the argument for dramatic further hikes in policy rates.
"With this level of yields it’s becoming attractive for an investor," said Nicolas Forest, chief investment officer at Candriam. "We have a slowdown of the economy and that’s supportive for the bond markets." His comment underlines how slower growth can counterbalance earlier inflation-driven pressure on sovereign debt.
U.S. stands apart
While energy-importing regions such as the euro zone, Britain and Japan had been hit hardest in the initial selloff, the United States became the notable laggard over the month. From April 30 to May 29 U.S. 10-year yields rose 6 basis points, while German yields fell 6 basis points over the same interval.
European data weighed on expectations for aggressive rate hikes there, but the U.S. economy showed resilience, supported in part by an AI spending surge. Market pricing moved decisively: traders removed expectations of any Federal Reserve rate cuts this year and at one point briefly priced in a full 25 basis point rate increase by December.
Data released on Thursday showed the Fed’s preferred inflation measure up 3.8% year-on-year in April, the fastest pace in three years, reinforcing the view that U.S. price pressures remained stronger than in parts of Europe.
Gilt market vulnerability
The UK gilt market again experienced sharp swings in May, reflecting its susceptibility to rapid selloffs. Yields on 30-year gilts climbed to 5.87% in mid-May, the highest since 1998, as the global rout combined with concerns that a successor to Prime Minister Keir Starmer might increase spending. Later in the month gilts rallied as hopes for a diplomatic breakthrough emerged, UK economic data softened, and frontrunner Andy Burnham said he would adhere to the government's fiscal rules.
Between April 30 and May 29, 10-year gilt yields outperformed those of Germany and the U.S., falling by around 21 basis points, although they remained 58 basis points higher than they were when the war began.
"If we look at Bank of England pricing, we’ve gone from two cuts at one point to nearly three hikes, so that’s been the main driver (of UK bonds)," said Matthew Amis, investment director at Aberdeen. "But also in the background the political volatility has clearly not helped."
Longer maturities and fiscal worries
The mid-May selloff hit longer-dated debt hardest, reflecting that these maturities are more sensitive to economic and fiscal factors than short-term securities. Inflation-adjusted real yields rose in both the U.S. and Europe, indicating that market concerns went beyond headline price readings.
Bank of America analysts identified worsening fiscal dynamics as a key driver of the U.S. Treasury selloff. Some investors also pointed to questions about the independence of new Federal Reserve Chair Kevin Warsh, who was appointed by U.S. President Donald Trump, suggesting that doubts about future policy direction may have contributed to market unease.
As Nicolas Forest framed a hypothetical concern: "Let’s imagine that he decides to cut rates despite higher inflation. That’s not very supportive for U.S. Treasuries." That remark captured investor anxiety about policy credibility and its potential effect on bond valuations.
The May episode underscores the sensitivity of sovereign debt markets to geopolitical shocks, energy prices and regional divergence in inflation and growth indicators. The interplay of those forces continues to shape expectations for central bank moves and fiscal trajectories, keeping bond markets on edge into the coming months.