Global bond markets fell on Friday as bond traders increased their bets on interest rate hikes by the Federal Reserve, with the probability of a rate hike by October rising to 50%. The yield on the 10-year U.S. Treasury reached its highest level since August, while the yield on the UK 10-year government bond rose by 16 basis points, hitting 5% for the first time since 2008. Bond markets in Germany, Canada, Norway, and other countries also experienced sell-offs. Media reports indicate that the market is concerned that a prolonged Middle East war could drive up global inflation.
<h2>U.S. Treasuries Sold Off</h2>
On Friday, influenced by news of increased U.S. military presence in the Middle East, the $31 trillion U.S. Treasury market saw a wave of selling, with yields on Treasuries across various maturities generally rising by 9 to 13 basis points, led by the two-year Treasury. The two-year Treasury is the most sensitive to monetary policy. The yield on the five-year Treasury broke above 4% for the first time since July, while the benchmark 10-year Treasury yield rose more than 11 basis points to 4.375%, marking the highest level since August.
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The money market has raised its bets on the Federal Reserve hiking rates this year to a 50% probability by October, abandoning previous expectations of two 25 basis point rate cuts before the outbreak of the Iran war on February 28.
There are also reports that the European Central Bank may begin discussing rate hikes in April and could tighten policy in June.
Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, stated:
<blockquote>
“As the conflict in Iran escalates and drags on, the U.S. Treasury market seems to be starting to worry about further inflationary pressures.”
“The market is no longer pricing in rate cuts for 2026 and is now starting to factor in a certain probability of rate hikes, which is driving U.S. Treasury yields significantly higher.”
</blockquote>
<h2>10-Year UK Bond Hits 5% for the First Time Since 2008</h2>
Eurozone government bond yields rose for the third consecutive day on Friday, following a significant sell-off the previous day. On Friday, the UK bond market continued to experience extreme volatility. The yield on the 10-year government bond, which serves as the benchmark for borrowing costs in the UK, surged to 5%, reaching this level for the first time since the 2008 financial crisis.
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Media reports indicate that this is a heavy signal for a country already facing fiscal fragility. Additionally, Prime Minister Keir Starmer is under pressure from leadership challenges within the ruling Labour Party. James Athey from Marlborough Investment Management stated that the shadow of the failed “mini-budget” in 2022, along with signals that the Bank of England may raise rates, has placed the UK in a “punishment zone.”
He said:
<blockquote>
“It has been a very turbulent week. As everyone is already familiar with, UK government bonds have performed worse than most assets.”
On Friday, the yield on the UK 10-year government bond rose by 16 basis points. The volatility in short-term bonds was even more pronounced. In just two days, the two-year yield increased by nearly 50 basis points, or 0.5 percentage points. During the day's trading, the two-year yield rose another 19 basis points to 4.59%.
</blockquote>
The speed of the market's shift is surprising. Just three weeks ago, the market widely believed that the Bank of England would cut interest rates, but now, the money market has begun to bet on three rate hikes of 25 basis points each this year, with even the probability of a fourth hike approaching fifty-fifty.
Analysts say that the UK's vulnerability stems from its heavy reliance on energy imports, sticky inflation, and dependence on external financing—factors that make it more susceptible to rapid changes in bond market sentiment.
Matthew Amis, Investment Director at Aberdeen, told the media:
<blockquote>
“If the Middle East conflict had not occurred, in another scenario, the Bank of England would have already begun to cut rates, and UK government bond yields might have fallen back to 4%, a trend that would have been driven by weak wage data. This precisely illustrates the current fragility of the UK economy.”
</blockquote>
For the UK government, the pressure from this round of rising yields is even greater than in 2008, as the current debt-to-GDP ratio is already double that of back then. Worse still, data released on Friday showed that borrowing last month reached £14.3 billion, exceeding market expectations.
<h2>Bond Markets in Germany, Canada, Norway, Australia, and Other Countries Plummet</h2>
Additionally, the yield on Germany's 10-year government bonds has surged to its highest level since the Eurozone debt crisis in 2011, primarily due to geopolitical tensions impacting the energy market. The yield on Germany's two-year government bonds rose by 3.2 basis points to 2.61%, having increased by about 59 basis points this month.
Previously, the European Central Bank decided to keep interest rates unchanged and acknowledged that energy prices are rising amid ongoing geopolitical tensions. Investors are cautiously monitoring developments. The European Central Bank removed its previous statement of being &#34;in a good position,&#34; reiterating its commitment to ensuring medium-term inflation stabilizes at 2% and incorporating stagflation risks into its economic forecasts. RaboResearch has included a scenario in its forecasts for the Bank of England to raise rates as early as April, while also expecting the European Central Bank to raise rates in April and take further action in the summer.
As a key benchmark for borrowing costs in Europe, the yield on Germany's 10-year government bonds rose to 3.025%, an increase of 7 basis points. This upward movement reflects growing investor concerns about market prospects as bond prices decline.
At the same time, the yield on Canada's 10-year government bonds rose to over 3.48%, driven by persistent global inflation pressures and a shift towards a hawkish monetary policy stance in North America. The yield on Norway's 10-year government bonds rose to 4.48%, the highest level since November 2008. Over the past four weeks, the yield on Norway's 10-year government bonds has increased by 23.20 basis points.
The yield on Australia's 10-year government bonds has risen to its highest level since 2011, but greater volatility has been seen in the short end, with the two-year yield rising to 4.69%. Overnight index swaps indicate that the market expects Australia to raise rates further by 70 basis points this year, following a cumulative increase of 50 basis points in February and March
Investec economist Sandra Horsfield stated:
<blockquote>
&#34;Central banks around the world have realized that viewing energy shocks as temporary risks is very dangerous, and there are also risks of direct and indirect impacts. Therefore, what we are seeing is a more hawkish policy stance.&#34;
</blockquote>

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The escalation of the Middle East conflict has heightened inflation concerns, leading to a sell-off in the global bond market. Traders have raised the probability of a Federal Reserve interest rate hike in October to 50%, completely reversing previous expectations of a rate cut, with U.S. Treasury yields rising across the board, and the 10-year yield reaching its highest level since August. Meanwhile, the yield on UK 10-year government bonds has hit 5% for the first time since 2008, putting pressure on European and global major bond markets, indicating that the market is re-evaluating the path of interest rates and inflation

- Global bond markets declined as traders increased bets on a Federal Reserve interest rate hike, raising expectations of a 50% probability by October.  
- U.S. Treasury yields surged to their highest levels since August, while the UK’s 10-year bond yield reached 5% for the first time since 2008 amid fears of rising global inflation due to ongoing Middle Eastern conflicts.  
- Other countries' bond markets, including Germany and Canada, also experienced significant sell-offs, highlighting concerns over geopolitical tensions affecting energy prices.

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Global bond market plummets! The probability of the Federal Reserve raising interest rates in October rises to 50%, U.S. Treasury yields hit a new high, and UK bonds break 5% for the first time since 2008