Global bond market "crash" spreads! Borrowing costs in the US, Japan, and the UK have all reached multi-year highs, and the market is betting on a rate hike by the Federal Reserve in December.

Global investors are selling government bonds, causing borrowing costs to rise to multi-year highs from Japan to the United States, as people are increasingly worried that inflation caused by war will force major central banks to seek rate hikes. The yield on the US 2-year Treasury note climbed to 4.07%, hitting a new high since March 2025. The yield on the US 10-year Treasury note rose by 7 basis points to 4.55%, the highest level in a year; the yield on the Japanese 30-year government bond touched 4% for the first time since the issuance of the bond in 1999. The UK's political crisis pushed the yield on the 30-year gilts to the highest level in 28 years. As the weekend approaches, the rise in Brent crude oil prices has intensified market concerns about consecutive inflation data releases in the US and ongoing US-Iran tensions, leading to increased selling pressure. In addition to betting on Fed rate hikes, there are also expectations in the market for Japan to tighten its policies, with the country's producer price index posting its largest increase since 2014. Subadra Rajappa, head of research at the Americas for France's Industrial Bank, said, "Bond yields do feel like they're spiraling out of control. The market is not only testing the Fed but also sending a warning to Congress. The longer rates remain elevated, the higher the cost of financing. Despite a gradual rise in bond yields in recent days, selling pressure intensified on Friday, with bond yields in Germany, Spain, Australia, and New Zealand also rising. Investors are also beginning to sound warnings, suggesting that higher borrowing costs could even stifle recent stock market gains. "The rising global bond yields are somewhat unsettling," said Prashant Newnaha, senior rates strategist for Asia Pacific at TD Securities in Singapore, "Persistently high oil prices may be a fatal blow to the bond market." Federal Reserve Board member Michael Barr said on Thursday that inflation is the biggest risk facing the US economy. Data released earlier showed that producer costs are rising at the fastest pace since 2022. Traders are forecasting a two-thirds chance of a Fed rate hike in December and are already expecting a 25 basis point increase by March 2027. For incoming Federal Reserve Chair Kevin Warsh, this is a challenging environment. He was confirmed by the Senate this week to lead the Federal Reserve, nominated by President Trump. Warsh's path to office is now clear, as he will be sworn in shortly after current Chair Powell's term ends on Friday. Rajappa said, "For Kevin Warsh, what's really important is inflation expectations. The Fed must shift its policy stance from accommodative to neutral and be prepared to act when necessary, which is crucial." Global selling pressure In Japan, the rise in yields also reflects mounting concerns about the country's fiscal policies. Reports suggest that the Japanese government is considering an additional budget to fund economic relief measures. Finance Minister Koizumi later said that the situation has not yet reached a point where additional budget supplementation is necessary. "In Japan, rates have long been close to zero, so the rise of the 30-year Japanese government bond yield to 4% is historic," said Rinto Maruyama, senior forex and rates strategist at SMBC Nikko Securities. "This indicates that Japan may be experiencing sustained inflation, having long suffered from deflation." On Friday, various Japanese government bond yields rose across the board. The yield on the 20-year Japanese government bond rose to its highest level since 1996, while the yield on the 40-year government bond set a new record high since its launch in 2007. Meanwhile, the UK is gearing up for a leadership battle that could lead to more public spending. Signs on Friday indicated that Manchester Mayor Andy Burnham may challenge Prime Minister Keir Starmer, triggering a sell-off in bonds. Investors are concerned that this may lead to a new round of political instability, prompting a more accommodative fiscal policy. The yield on the UK 10-year government bond briefly soared to 5.17%, reaching a new high since 2008. Since the US and Israel's attacks on Iran, the UK's benchmark bond yield has risen by nearly one percentage point. Traders have also shifted their expectations for the Bank of England's monetary policy from rate cuts to rate hikes. As of Friday, the swap market expects the UK to raise rates at least twice by the end of the year, a stark contrast to expectations for two rate cuts less than three months ago.