London, May 18, 2026, 11:56 (BST)
Government bonds lost ground from Tokyo to New York on Monday with the Iran conflict keeping oil prices elevated and investors looking at the chance central banks could hike rates again. The U.S. 10-year Treasury yield went to 4.631%, a level not seen since February 2025.
Markets were betting on looser policy, not tighter, so the shift is catching traders off-guard. Now, odds for a Federal Reserve rate hike by December are over 50%. In the euro zone, futures show an 80% chance the European Central Bank moves up rates next month with three hikes priced in for the rest of the year.
Oil is front and center. Brent hovered near $110 to $111 a barrel after a drone hit lit up a fire at a UAE nuclear plant, and the Strait of Hormuz, which usually handles close to a fifth of the world’s oil and gas trade, stayed mostly closed.
Japan’s bond market took a hit. The 30-year Japanese government bond yield hit a record 4.200%, and the 10-year yield traded at its highest since October 1996, after news Tokyo could issue more debt to help soften the economic blow from the war. DBS strategist Eugene Leow called it a “rolling re-pricing” as investors dealt with inflation risk. Reuters
Bund yields in Germany moved up to 3.193%, the highest in 15 years. UK gilts were steadier. The 10-year gilt yield dropped 4 basis points to 5.14% Monday after last week’s jump of 26 basis points, which took it to an 18-year peak.
Selling pressure moved to stocks. European shares dropped 0.5%, the Nikkei in Japan lost 1%, and futures for the S&P 500 and Nasdaq were lower as rising yields weighed on growth and tech valuations.
Nvidia and Walmart earnings later this week will be a test for the AI rally and U.S. consumer spending as energy costs climb. “Higher yields do not stay confined to bond markets,” Lale Akoner, global market strategist at eToro, said. That’s a risk for equity values and governments with big debt. Reuters
Europe’s travel stocks dropped 1.6%. Ryanair, Lufthansa and EasyJet each fell, losing between 2% and 3.1%. Michele Morganti at Generali Investments said European equities are still at risk compared to the U.S. because of weaker earnings and more exposure to energy prices.
G7 finance chiefs in Paris talked about the bond selloff, with inflation, market swings and public debt on the agenda. French Finance Minister Roland Lescure described the markets as seeing a correction, not a collapse. ECB President Christine Lagarde said, “I always worry, that’s my job.” Reuters
Currencies were under pressure. The dollar index slipped to 99.12 but hovered close to last week’s highs. India’s rupee fell to a record low, with expensive oil and climbing global yields hurting emerging-market assets. Gold picked up from its six-week low, but appetite stayed weak since higher rates make the metal’s lack of yield less attractive.
Inflation numbers have rattled the market. Investors were already on edge last week after data from the United States, China, Germany and Japan. Nick Twidale at ATFX Global said now the data is finally matching the inflation worries that have built up since the Middle East conflict.
The selloff still isn’t a sure thing. Kenneth Broux at Societe Generale said it would take lower oil, bigger recession worries to push up haven bond demand, or yields rising enough to bring buyers back, to stop what he called a “slow-motion crash.” Reuters
Markets are reacting to the oil shock like it’s a rates move. Central banks have the tougher job. Inflation is going up due to supply problems, but those higher prices could also push growth lower.
