Global bond markets faced selling pressure in the first six months of the year amid escalating geopolitical tensions in the Middle East starting at the end of February, which drove up oil prices and fueled inflation concerns, narrowing the room for maneuver in monetary policy.
The broader effects of the US-Israel-Iran war led to sharp market movements.
The disruption of tanker traffic via the Strait of Hormuz, rising insurance costs, and deepening supply concerns fueled estimates that inflationary pressures would rise, while prominent expectations that central banks would cut rates before the war were replaced with forecasts of more hawkish measures.
The Fed was previously expected to cut rates twice over the course of the year but the uncertainty caused by the war reversed these estimates, as markets are now nearly certain that the Fed will hike rates at least once by the end of the year.
The US 5- and 10-Year Treasury yields surged in the first half by 50 basis points to 4.23% and by 30 basis points to 4.47%, respectively.
The US 5-Year Treasury yield reached 4.35% on May 19, its highest since February 2025, while the 10-Year yield reached 40.69%, its highest since January 2025.
Concerns over energy supply in Europe affected the inflation outlook in the region, prompting the European Central Bank (ECB) to make hawkish decisions.
The ECB cut its three key interest rates by 25 basis points at its June 2025 meeting, maintaining its policy stance at the 11 meetings held since then.
The ECB raised its rates by 25 basis points at last month’s meeting, signaling rising inflation risks in the region. The rate hike came in for the first time since September 2023.
The bank’s decision was significant because it was one of the first to respond to rising energy and oil prices triggered by the war.
ECB President Christine Lagarde, during the Portugal forum’s policy panel on July 2, said risks in the global economy are more broadly balanced now than a few weeks before the event and that the stagflationary environment is behind us.
The eurozone’s annual inflation, which stood at 2% in December 2025, reached 2.8% last month.
Germany’s 10-year bond yield remained flat at 2.86% in the first half, while the UK’s 10-year bond yield climbed around 32 basis points to 4.8%.
Germany’s 10-year bond yield reached 3.19% at its highest since May 2011, and the UK’s 10-year bond hit its highest level since July 2008 at 5.18% during this period.
Similar developments came to the fore in Asian bond markets.
The Japanese yen’s depreciation against the US dollar by falling to 161.9, its lowest in 40 years, fueled the selling pressure in the bond market and deepened inflation risks in the country.
Japan’s 10-year bond yield rose to 2.85%, its highest since 1997.
China emerged from the deflationary zone via the cost channel, and a buyer-driven trend came to the fore in the first half, as the country’s 10-year bond yield fell from 1.84% to 1.73%.
Tim Waterer, chief market analyst at KCM Trade Global, told Anadolu that global bond yields trended higher in the first half, reflecting the impact of high oil prices and inflationary pressures, which in turn forced central banks to maintain a tighter stance.
“Looking into the second half of the year, if oil prices stay roughly around current levels, global bond yields should behave and trade within a relatively stable range,” he said.
“However, any meaningful upward move in oil would likely see yields matching higher again, as renewed inflation concerns would push central banks toward an even more hawkish stance,” he added.