Bond yields soar as governments pay the price for U.S.-Iran stalemate

A global sell-off of government bonds gripped markets Tuesday morning, sending borrowing costs to multi-decade highs, as hopes for an end to hostilities it the Middle East rapidly faded.

It comes after a window for a new deal to be reached between the U.S. and Iran closed without a breakthrough, reigniting concerns about inflationary pressure.

On Monday, U.S. President Donald Trump ruled out extending a ceasefire between Washington and Tehran, while Iran issued fresh threats of military escalation. Both sides have rejected further peace talks.

Overnight, a cargo vessel was struck by a projectile as it transited the Strait of Hormuz — a waterway that acts as a critical shipping route for global trade and has become a key sticking point in negotiations. The effective closure of the strait throughout the nearly six-month war has seen the cost of energy and other vital commodities rise.

Oil prices extended their rally on Tuesday, with global benchmark Brent crude oil futures hovering above the $90-a-barrel mark.

At 7:38 a.m. ET, yields on U.S. 30-year Treasurys were up almost 3 basis points to 5.335%, the highest level since 2002. The yield on 20-year Treasury notes hit a post-2006 high, while the benchmark 10-year Treasury yield was last seen at 4.748%, its highest since 2007.

Bond yields and prices move in opposite directions, with one basis point equaling 0.01%, or 1/100th of 1%.

Downward pressure was also seen on the bonds issued by governments beyond the U.S., with yields hitting or nearing multi-decade highs in various markets.

Germany’s benchmark 10-year bund yield was last seen trading at a 15-year high, while its French counterpart reached its highest yield since 2008. Japan’s 10-year bond yield rose to 2.941%, topping the 30-year high seen in the spring. Yields also spiked across the curve on British, Italian, Swiss and Canadian government bonds.

In a Tuesday morning note, Dan Coatsworth, head of markets at AJ Bell, said that unsuccessful efforts to bring an end to the war have put inflation fears and potential interest rate hikes front of mind for investors.

But he added: “Rising long-dated bond yields are not driven solely by expectations of higher interest rates and inflation fears. They can also reflect concerns around high levels of government borrowing and investors demanding greater compensation for the risks of holding long-dated government bonds.”

Deutsche Bank’s Jim Reid said in a note that there hadn’t been a single catalyst for the declines in the bond market over the past 24 hours, “but with few signs of the US and Iran coming to any sort of a deal, that meant investors priced in a more extended closure of the Strait of Hormuz.”

“Investors are pricing in a more protracted period of higher oil prices again,” he said. “As investor concern mounted about a longer closure for the Strait of Hormuz, that put pressure on fixed income, particularly longer-dated sovereign bonds.”

Speaking to CNBC’s “Squawk Box Europe” on Tuesday, Carl Weinberg, founder of High Frequency Economics, said he believed vast capital injections in the development of AI were also contributing to the unwinding in the bond market.

“The build-in of AI infrastructure, the investment in technology, the investment in utilities and so forth — that’s borrowed a lot of money,” he said, saying he’d seen estimates of up to $600 billion borrowed over the last year, with a further $200 billion worth of funding, borrowing, new issuance and IPOs “coming in the on the hopper already.”

“This money comes from the same pool of savings that funding the government deficit comes from, as well as funding the investment of every other business in the economy,” Weinberg added. “And normally we think of the government as a kind of hyper borrower that borrows first and pays whatever it takes to get the money that it has to borrow, and then what’s left over goes to the mini borrowers.”

Thanks to advancements in artificial intelligence, however, Weinberg said a new hyper borrower had emerged in the form of the “collective AI enterprise.”

“They’re borrowing so much money that I believe … they and the government together are crowding out investment by small businesses, and that’s what’s driving up bond yields,” he told CNBC. “And it’s not just the United States, it’s everywhere in the world because everywhere in the world people are sending money to the United States to fund this. So the balance of payments is subtracting savings from other countries and making their bond yields go up as well.”

– This story has been updated to reflect that Japanese 10-year bond yields are at a 30-year high.