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The bond market is doing its traditional job of intimidating governments – and investors – as fears of an inflation shock from the Iran war grow.

The bond sell-off which gripped the markets last week is continuing this morning, driving up governments’ cost of borrowing from Tokyo to Washington DC.

With the strait of Hormuz still largely closed, the prospect of a lengthy period of shortages of oil and gas, which would push up costs of energy, transport and food, is growing.

Last Friday, global government borrowing costs soared – with the yield (or interest rate) on Japan’s 30-year bond hitting 4% for the first time.

US and eurozone debt also suffered, as traders bet that central banks will fored to raise interest rates, or abandon hopes of rate cuts, to stem the inflationary waves hitting the global economy.

As analysts at ING put it:

First, even if the war were to end tomorrow, energy prices may not fall as far as many expect. Significant drawdowns in oil inventories are likely to keep upward pressure on prices for some time yet.

Second, natural gas prices currently look too low. There is meaningful upside risk if disruptions persist into the third quarter, particularly as competition intensifies between Asian and European buyers for LNG.

It’s a reminder that, for all the political noise, its energy prices will remain the dominant force for central banks. It’s why we’re expecting rate hikes from the Bank of England and European Central Bank in June, and why we no longer expect a Federal Reserve rate cut until December.

This morning… US and Japanese government bonds have extended their losses, pushing up yields (which rises when bond prices fall.)

Benchmark 10-year U.S. Treasury yields jumped to their highest since February 2025 this morning at 4.6310%.

Yields on the 30-year Japanese government bond hit the highest level on record at 4.200%, while while the 10-year yield reached its highest since October 1996 at 2.800%.

The agenda