U.S. government bond yields climbed sharply on Friday as a global sell-off in fixed-income markets gathered pace. Traders are increasingly concerned that higher oil prices linked to the conflict in the Middle East are feeding through to inflation, and that central banks will respond with higher interest rates.
At 14:35 ET (18:35 GMT), the benchmark 10-year Treasury yield was trading 14 basis points higher at 4.599%, marking its strongest level in almost a year. The long end of the curve moved even more dramatically: the 30-year Treasury topped the psychologically important 5% threshold and was last recorded up 11 basis points at 5.125%, its highest reading since June 2007.
The sell-off in government bonds was not limited to U.S. debt. The United Kingdom saw its 30-year gilt yield rise to its highest level since 1998, and Japan’s 30-year government bond reached its highest yield on record. In Japan, government data released for April showed producer prices accelerating at the fastest annual pace since May 2023, a development that boosted the market's expectation that the Bank of Japan could consider tightening.
Market strategists highlighted the breadth of the move. "Global bonds have been under pressure throughout the week due to hot inflation readings in multiple large economies and political uncertainty in the United Kingdom. The 10-year Treasury yield is 24 basis points higher this week. The 10-year Gilt yield is higher by 26 basis points this week. The 10-year JGB yield is 23 basis points higher this week," said Michael O'Rourke, chief market strategist at Jones Trading.
O'Rourke added that the weakness in bonds was affecting risk appetite elsewhere. "As bonds remain weak, institutional equity investors are cautious heading into the weekend," he said. That caution was reflected on Wall Street, where the benchmark S&P 500 index was down nearly 1% on Friday.
Inflation prints lift rate-hike probabilities
Inflation data released this week has been a central catalyst for the move in rates. U.S. consumer price index and producer price index reports for April came in hotter than expectations and highlighted the impact of rising oil prices tied to the Iran war on costs for both American consumers and manufacturers. Those two measures feed into the core personal consumption expenditures price index, which is the Federal Reserve's preferred inflation gauge.
Diane Swonk, chief economist at KPMG U.S., discussed how recent price readings are likely to translate into a hotter core PCE. "The energy prices are hot and to be expected. The components of CPI, PPI and import prices that feed directly into the PCE index suggest something that is a bit above a 0.6% monthly advance. That will give us a wicked hot print of 3.6% to 3.7%, the hottest annual print since May 2023. That is being driven by a lot of the boost to inflation from the war in Iran," she said on X.
Swonk also offered a projection for the core measure. "The core PCE is poised to rise a more tempered 0.3% with rounding - could be slightly above or below. That would put the core at 3-3.1%, a tick slower than the 3.2% annual pace in March but still way too hot," she said.
Investors have responded to the hotter inflation backdrop by increasing the odds that the Federal Reserve will raise interest rates at future policy meetings. On prediction market Kalshi, the chances of the Fed hiking interest rates before July 2027 have risen to 60%.
Swonk cautioned that the inflationary effects stemming from the war are ongoing. "We are not done with the blistering effects of the war and they will get worse before they get better. The Fed is leaning toward wait and see but significant contingent is worried next move will be up not down on rates. The latter is our forecast in second half that is not an easy place to be," she said.
Leadership change at the Fed during a sensitive moment
The inflation backdrop and market moves coincide with a leadership transition at the Federal Reserve. Friday marked Jerome Powell's last day in the role as Fed chair. He will be replaced by former Fed governor Kevin Warsh, who was President Trump's pick to take over from Powell. The U.S. president has publicly called for lower interest rates during his second term, has criticized the Fed and Powell, and his administration has opened an investigation into the central bank.
Geopolitics and diplomacy do not ease tensions
Markets were also influenced by geopolitical developments and recent diplomacy. Sentiment was dented after President Donald Trump returned from a trip to China without what markets perceived as a major breakthrough on trade or the Middle East.
During the trip, Mr. Trump praised Chinese President Xi Jinping and highlighted several announcements, including China's agreement to buy oil from the U.S., commitments to purchase Boeing aircraft and agricultural goods, and an opening for Visa in the country. Chinese state media reported that Xi noted progress toward a more constructive relationship between the two countries and agreed to strengthen communications and coordination on key issues. However, the leaders provided few specifics about the agreements signed during the visit.
On the Iran conflict, the discussions between the two leaders yielded limited traction. Mr. Trump told Fox News that Xi would like to see a peace agreement between the warring parties, and that China prefers the Strait of Hormuz remain open and does not support Iran charging transit tolls. The president also said China would not provide military equipment to Iran.
Commentators flagged continued uncertainty over the Strait of Hormuz and its implications for shipping and oil flows. "Looks like the bond market is reminding everyone that the Strait remains closed. And China isn’t going to do anything to help open it up," said Sonu Varghese, chief macro strategist at Carson Group, on X.
Political turmoil dents UK gilts and the pound
Elsewhere, developments in the United Kingdom added another layer of pressure on government bonds. A poor showing in last week's council elections for Prime Minister Keir Starmer's Labour Party has precipitated a leadership crisis, with several MPs resigning or publicly calling for Starmer's resignation. That political uncertainty has weighed on the cost of government borrowing.
Dan Coatsworth, head of markets at AJ Bell, linked the political unease to recent moves in gilt yields. "Since the start of this year, there has been a growing sense that Keir Starmer's leadership of the country and the Labour Party is fading, with last week's disastrous local election results potentially spelling the end of his premiership. This intense speculation has led to uncertainty about the future of the country under a new leader, which has fueled a steady rise in the cost of government borrowing, or gilt yields," he said. Coatsworth noted that the trend reached a tipping point during the week, with both the 30-year and 10-year gilt yields hitting levels last seen in 1998 and 2007 respectively.
The British pound reflected the strain, trading lower this week and poised for a decline in excess of 2%.
Market implications and sectors affected
The combination of higher oil prices, accelerating inflation measures, and political uncertainty has pushed bond yields higher across several major markets. That dynamic is creating headwinds for equities as institutional investors reassess risk exposure, and it is prompting closer scrutiny of central bank policy paths. Energy costs are a direct channel to consumer and producer inflation, while sovereign borrowing costs are being influenced by both macroeconomic data and domestic political developments.
Looking ahead, markets will remain sensitive to further inflation releases, central bank commentary, developments in the Middle East affecting oil flows, and political developments in the United Kingdom. In the near term, the higher yields already observed are contributing to a more cautious stance among investors as they evaluate the prospects for monetary tightening and broader economic effects.