Sovereign bond yields hit highest since 2008! US and Japanese government bonds break key levels, why is the global bond market collapsing across the board?

The global bond market is experiencing the most intense sell-off in nearly two decades. The Bloomberg Global Government Bond Index yield has risen for four consecutive trading days, reaching 3.72%, its highest level since mid-2008—this is not a local fluctuation in a single market, but a systemic repricing sweeping across the United States, Japan, Australia, and the entire G10.

On Tuesday (September 1), the US 10-year Treasury yield briefly rose to 4.78%, the highest since January 2025; Japan’s 10-year government bond yield touched 3% for the first time in 30 years, and Australia’s 10-year bond yield also climbed to its highest since 2011.

The logic driving this sell-off is tightly interlinked: Fed Chairman Kevin Warsh reiterated his anti-inflation stance at the Jackson Hole Symposium, while escalating US-Iran tensions pushed Brent crude oil back above $90 per barrel. Combined with US national debt surpassing $40 trillion and a persistent fiscal deficit, the market is comprehensively reassessing the pricing of “higher rates for longer.”

However, the more critical question is: The era of cheap capital that has supported global asset pricing for over a decade may have come to an end. Analysts believe that a 5% US Treasury yield may not be the endpoint but rather the starting point of a new normal.

Trigger: Warsh’s Hawkish Stance and Oil Price Shock

The immediate triggers for this round of selling are the simultaneous eruption of two forces.

Last Friday at Jackson Hole, Warsh once again reiterated his determination to crush inflation—marking the fifth consecutive year the Fed has failed to bring inflation under its target. Following his speech, the rate swap market’s probability for a Fed rate hike in September jumped from 34% to 65%.

Meanwhile, the US-Iran conflict escalated again, raising market concerns over prolonged disruptions in the Strait of Hormuz energy corridor. Brent crude rose by 1.2% to about $91.55 per barrel. Higher oil prices have directly reinforced inflation expectations, further depressing bond prices.

According to Bloomberg, several current and former US-Iran officials stated that the Middle East conflict is expected to last for several months. This means upward pressure on energy prices is unlikely to dissipate in the short term, and uncertainty over the inflation trajectory will continue to trouble the bond market.

The combination of these two forces has suddenly increased pressure on the bond market. Both Barclays and Société Générale revised their interest rate forecasts after Warsh’s speech, now including rate hikes in September and December as their base scenario—moves not previously anticipated.

Core Logic of US Treasuries: Deficit Out of Control and Real Rates Repriced

The rise in US Treasury yields is driven by deeper structural factors beyond geopolitics.

US national debt surpassed $40 trillion in August, further intensifying supply pressure in the Treasury market. Meanwhile, major tech firms are issuing a large scale of long-term corporate bonds to fund artificial intelligence infrastructure, with approximately $200 billion in high-rated corporate debt expected to hit the market in September, competing with Treasuries for the same pool of funds.

According to MarketWatch, the US nominal GDP growth rate has accelerated to about 6.6% year-over-year, but real growth is only 2.1%, with the difference mainly reflecting inflation—the GDP deflator rose 4.4% year-over-year. Historically, the 10-year Treasury yield is usually higher than the GDP deflator, but the current spread between them is at a historical low, suggesting yields still have room to rise.

More notably, the current yield rise is mainly driven by real rates (actual returns) rather than inflation expectations. This indicates that the bond market is not simply pricing in inflation but demanding a higher real return—reflecting a fundamental reassessment of the US economy’s long-term equilibrium interest rate.

MarketWatch reports that nominal GDP growth is also outpacing the growth in money supply, with increased velocity of money—historically highly correlated with rising long-term interest rates.

It is reported that Treasury Secretary Besant said Monday he agrees with Warsh on the nearly $31.5 trillion Treasury market. The Treasury had announced an expansion of buybacks for 10- to 30-year Treasuries in mid-August, but analysts believe the authorities’ current goal may be merely to stabilize yields, not to intentionally push them lower.

Global Central Bank Tightening Resonance: End of the Cheap Money Era

Another core dynamic of this bond market sell-off is the end of the global cheap money era.

For years, the low yields on US Treasuries depended partly on a steady inflow of cheap foreign capital from low-interest economies such as Japan and Europe. However, as major central banks worldwide sequentially tighten monetary policy, this logic is unraveling.

As overseas yields rise, the relative appeal of US Treasuries to foreign investors diminishes—especially after factoring in currency hedging costs, further amplifying upward pressure on US Treasuries. Bloomberg strategist Mark Cranfield notes:

“G10 fixed income traders are increasingly watching Japanese government bonds, while Australian bonds are more frequently priced in line with JGBs than US Treasuries. The backdrop is very adverse: sticky inflation combines with enormous fiscal deficits in the US, Japan, the UK, and France.”

Japan’s policy shift is particularly pivotal. The Bank of Japan ended the world’s last negative interest rate policy in 2024, and Japanese bond yields have since soared. The 10-year JGB yield was only about 1.5% a year ago and has now doubled to 3%.

International investors’ share in Japan’s monthly spot bond trading has risen from 12% in 2009 to about two-thirds, and JGBs are once again becoming a major global asset allocation option—meaning funds that had previously flowed into US Treasuries are now partially returning to Japan.

At the same time, fiscal pressure is also significant. Prime Minister Sanae Takachi’s government has launched an unprecedented scale of fiscal spending, but has yet to clarify the financing for a cut in the food consumption tax, further raising concerns about fiscal sustainability and pushing JGB yields higher. In the budget requests for the next fiscal year, Japan’s Ministry of Finance has set a record debt servicing cost of 36.6 trillion yen (about $230 billion).

Rate Hike Expectations Rise Sharply for Central Banks in the US, Japan, Europe, Australia, and Others

Amid the global bond market sell-off, the wave of global rate repricing continues to spread, with bets on central bank tightening measures rising significantly.

After the Jackson Hole Global Central Bank Annual Meeting, Bloomberg data shows that the swap market’s probability of a Fed rate hike in September has surged from 34% before Warsh’s speech to 65% now.

Additionally, rate swaps indicate that a rate hike at the ECB’s September 10 meeting is now fully priced in, the Reserve Bank of New Zealand’s odds for a hike this week are at 98%, and the Bank of Japan’s odds for a September 18 hike are 92%, with an October hike now fully priced in.

Wall Street Insights article writes that, according to Japanese public broadcaster NHK, US Treasury Secretary Besant met separately with Japan’s Finance Minister Satsuki Katayama and Bank of Japan Governor Kazuo Ueda during the G20 finance ministers meeting on Monday. Besant explicitly informed them that Japan should raise rates in its next steps.

Later, in an interview with CNBC, Besant said: “I have information the markets don’t know, and I believe the Japanese government and the Bank of Japan will take action to strengthen the yen.” This is the clearest signal from Washington yet on Japanese monetary policy.

Pepperstone Group strategist Dilin Wu noted, “The policy paths for the world’s major central banks will be revealed within the same month, creating a high-intensity pricing window for rates and forex markets.”

Global Resonance: Chain Reactions from Australia to Europe

This sell-off has evolved into a globally synchronized resonance rather than an isolated event in a single market.

On Tuesday, Australia’s 10-year government bond yield climbed to the highest level since 2011, after stronger-than-expected inflation data prompted traders to ramp up bets on a fourth Reserve Bank of Australia rate hike this year, with the probability reaching 54%.

Prashant Newnaha, Senior Asia-Pacific Rate Strategist at TD Securities, said:

“The bond market isn't collapsing, but it's sending a very clear memo: the stickier inflation is, the longer and higher policy rates must stay. Fiscal deterioration and higher term premia will remain key market themes.”

Seasonal patterns suggest the pressure may persist. According to Bloomberg data, over the past decade, September and October have been the worst months for global bond indices, with average monthly declines exceeding 1%.

Stock Market Under Pressure, Borrowing Costs Climb Across the Board

Rising yields are transmitting through various channels to the real economy and financial markets.

For the stock market, Dakota Wealth Management Senior Portfolio Manager Robert Pavlik stated:

A 10-year Treasury yield at 4.75% is a threshold that “really gets investors’ attention,” raising concerns the yield will hit 5% and trigger a stock market adjustment.

Franklin Templeton Institute’s Chief Market Strategist Chris Galipeau said, “The stock market can still tolerate current rates, but if the 10-year yield breaks above 5%, stocks could run into some trouble.”

For ordinary households, the yield on the 10-year Treasury serves as the pricing benchmark for 30-year mortgages, so rising yields translate directly into higher home-buying costs.

MetLife Investment Management Chief Market Strategist Drew Matus pointed out, yields breaking out of the 3.5%-4.5% ‘comfort zone’ will force households to boost savings, imposing downward pressure on consumption.

The 30-year Treasury yield is now at 5.27%, with 55 trading days above 5% since January—the most since 2006. In mid-August, the 30-year yield reached 5.34%, its highest since 2007.

Natixis Investment Managers Portfolio Strategist Garrett Melson warned that if yields move higher, this will amplify headwinds for equities, especially as recent economic hard data have softened. He said:

“Attractive real yields combined with a whiff of slowing growth can change the market narrative and reignite demand to buy bonds.”

Friday’s upcoming August nonfarm payrolls report will be the next key observation window.