A broad-based selloff in global government bonds intensified on Monday, with the U.S. two-year Treasury yield climbing to 4.354%, its highest level since 2025, as investors reassessed monetary policy outlooks amid persistent inflation pressures and geopolitical risks.
Yields across major developed markets surged, reflecting a shift in expectations for central bank policy. In Europe, Germany’s two-year Schatz yield rose to 2.936%, the highest since July 2024, while the 10-year Bund yield reached 3.352%, a level last seen in 2011. French 10-year OAT yields climbed to 4.15%, the highest since November 2008. Japanese government bond yields also rose sharply, with the 10-year JGB yield hitting 3.000%, the highest since late 1996, and the two-year yield reaching a record 1.800%.
The selloff was driven by a combination of factors, including elevated inflation expectations and rising geopolitical tensions in the Middle East. Crude oil prices surpassed $90 per barrel following direct military exchanges between the U.S. and Iran in the Persian Gulf, including missile strikes on Larak Island and retaliatory attacks on U.S. bases in Jordan.
Market pricing suggests growing expectations for tighter monetary policy. Money markets now assign a 60% probability of a 25-basis-point rate hike by the Federal Reserve at its September 16 meeting, while the European Central Bank is widely expected to deliver another rate increase at its September 10 policy decision. Federal Reserve Chairman Kevin Warsh, speaking at the Jackson Hole symposium, emphasized that central bankers "have work to do" to bring inflation under control.
Upcoming economic data will further shape policy expectations. The U.S. JOLTS job openings report for July and the Eurozone CPI data for August are both scheduled for release on Monday, while Friday’s Non-Farm Payrolls report will provide additional insight into labor market conditions. Japan, meanwhile, has requested a record fiscal budget of 143 trillion yen to fund defense expansion, energy transition projects, and budget deficits, adding to fiscal concerns in the world’s third-largest economy.
