Prior to this, the yield had not been higher since 2023. Meanwhile, the yield on the 30-year bond hit the highest level since 2007. To date, the US Treasury’s effort to influence long-term yields through market intervention has not had a sustained impact, which suggests that intervention without changes in market fundamentals may sometimes have unintended market reactions.
It might convince some traders that things are worse than expected. The latest incident in the Strait of Hormuz appears to have reinforced concerns that the crisis could persist, potentially leading to higher inflation. Futures markets now show an implied 68% probability that the Fed will raise the benchmark interest rate in September.
In the United Kingdom, the yield on the 10-year gilt hit 5.2%—the highest since June 2008—likely reflecting a view that inflation will accelerate. Moreover, futures markets are now pricing in a 70% probability that the Bank of England will hike the benchmark interest rate in November. With memories of the tenure of Liz Truss hanging over new Prime Minister Andy Burnham, the Chancellor of the Exchequer John Healey will present a budget in October. The new government must navigate a difficult path, attempting to appease bond investors while pleasing voters with favored spending programs.
If bond investors interpret the budget as not addressing fiscal issues, bond yields could rise sharply. The government cannot afford such an outcome, given Britain’s borrowing costs already exceed those of the United States, Germany, and France.
Meanwhile, in Germany, the yield on the 10-year bond hit 3.36%—the highest since April 2011. The yield in France hit the highest since 2008, and yields in Italy and Spain hit their highest levels in three years. Investors generally expect the European Central Bank to raise its benchmark rate in September. Futures markets now show an 80% probability of another rate hike in December.
In Japan, the yield on the10-year government bond briefly surpassed 3% for the first time in three decades. While the latest surge may partially reflect the potential inflationary impact of events in the Middle East, traders are also focused on Japanese fiscal policy as well as interest differentials with the United States. Yields also increased in other East Asian countries.
All of this raises an important question: Are higher yields a bad thing? And, as in many other aspects of life, the answer is: It depends.
Bond yields generally move to bring supply and demand for loanable funds into balance. If demand for funding rises in relation to supply, yields will often tend to rise, and vice versa. If the performance of an economy improves, leading to greater profitable investment opportunities, the equilibrium yield could rise, which would not necessarily be a bad thing. If, however, demand for funds rises relative to supply because of a lack of fiscal probity, yields may rise, potentially stifling private sector credit activity. Or, if expectations of inflation rise and investors require protection from the risk of inflation, yields may also rise and that won’t be a good thing.
Consider the period between the global financial crisis (2008 to 2010) and the COVID-19 pandemic (2020 to 2021): This period was characterized by historically low inflation and historically low bond yields. Some economists suggested that, in part, the low yields reflected an excess supply of savings in the world relative to investment opportunities. It might have been related to weakness in aggregate demand in the global economy.
Now, fast forward to the current situation: We have higher expectations of inflation, which may partly explain the rise in yields. And we have historically large budget deficits in several major countries, which may also explain such high bond yields. But we also have a new, revolutionary technology that has led to massive growth in investment. It has led to expectations of strong productivity growth and potentially faster economic growth. These, too, might partly explain the rise in bond yields. In that sense, higher bond yields could be seen as reflecting a better economic picture.
Indeed, yields that are too low can lead to poor capital allocation. If yields are closer to zero, there is effectively no opportunity cost associated with making bad investments. A high yield can have a disciplining effect on capital markets, likely directing capital toward the most potentially profitable use cases.
Consider the case of Japan which, until recently, had yields near or below zero. It also had a prolonged period of suboptimal growth. Yet now, the yield on the government’s 10-year bond is around 3%—the highest since the mid-1990s. Some analysts suggest that this is a sign of economic health, and could mean that the country has many favorable investment opportunities, and that Japan could soon return to a sustained higher rate of growth.
On the other hand, Japan faces higher-than-desired inflation. In addition, it faces a potentially disruptive level of government debt. These factors partly explain higher yields. And Japanese yields have suddenly risen sharply, which was probably not just due to a sudden improvement in economic prospects. As such, it remains unclear whether Japan’s economy is capable of supporting the 3% yield. In any event, at the very least, the high yields will likely mean that capital will only flow to the best opportunities.
One factor that has lately contributed to higher yields is the rise in energy prices. Last week, the price of Brent crude went as high as US$97 per barrel before somewhat retreating. Just a week earlier, the price was under US$88 per barrel. The sharp rise appears to be related in part to the conflict between Iran and the United States. During the week, there has been a return to hostilities between the two countries. Moreover, there does not appear to be any movement toward a resolution, either. If higher prices are sustained, they could add to inflationary pressures around the world.
Meanwhile, the price of European natural gas has increased sharply—hitting the highest level since early 2023. In just the past month, the price has risen roughly 40%. About 20% of globally traded liquified natural gas travels through the Strait of Hormuz, mostly coming from Qatar, and much of it goes to Europe. This route has been disrupted. Plus, the winter season is approaching while European gas reserves are at a level below normal. The latest inflation data from the European Union showed acceleration, thereby boosting the likelihood of further tightening of monetary policy by the central bank.
Finally, as mentioned above, US yields temporarily fell last week after Federal Reserve Governor Christopher Waller spoke about the future trajectory of monetary policy. Specifically, Waller said that he “would be inclined to support holding the target for the federal funds rate at its current setting.” He said that his decision at the upcoming meeting this month will be determined by data. Specifically, he said that “if there is continued progress toward our 2% goal, then I am willing to support holding the policy rate at its current level. But if inflation comes in hot, I would consider a rate hike.” Following Waller’s comments, the future market’s implied probability of a rate hike this month dropped from 63.2% to 50.3%.
The comments from Waller, which follow comments by New York Federal Reserve Bank President John Williams suggesting that inflation is being tamed, led not only to a drop in US bond yields but also a decline in the value of the US dollar.
The global selloff of government bonds appears to reflect multiple risks in the global financial system. These include expectations of higher inflation, expectations of tighter monetary policy, concern about fiscal policy in multiple countries, and concern about the massive issuance of bonds by tech companies.
Yet, equity investors appear to be largely focused on artificial intelligence than on those risks. The performance of equity prices likely reflects the view that, despite short-term headwinds and risks, massive investment in AI could generate sizable positive returns in the near future.
Moreover, the probability of two rate hikes this year is now 44.1% while that of no rate hikes this year is only 14.3%. Thus, investors appear to see a significant likelihood of monetary policy tightening this year. Meanwhile, the yield on the Treasury’s 10-year bond increased modestly today on the employment news. In addition, the US dollar rose in value. Let’s look at the details:
The US government releases a monthly report on the jobs market that includes the results of two surveys—a survey of establishments and a survey of households. The establishment survey found that, in August, 162,000 new jobs were created. This was the highest number of jobs created since March, and was a much bigger number than many analysts expected. Moreover, throughout 2026, job growth has been relatively healthy after being relatively feeble in 2025.
As noted, investors greeted the news as evidence of economic strength and potentially higher inflation. President Trump, however, called for lower interest rates, saying that strong employment growth means that the United States is a good credit risk. He has repeatedly called for lower interest rates and, as of the time of writing, once again called on the Fed and its new chair to cut rates. Thus, if the Fed chooses to raise the benchmark rate this month, the new chair could face criticism from the administration.
In any event, the strong job growth was concentrated in just three categories: Employment was up by 28,400 in healthcare and social assistance, up 67,800 in accommodation and food service, and up 50,000 in local government (mostly in education). Combined, these three categories accounted for 90% of US job growth.
Meanwhile, there was moderate job growth in construction and manufacturing, feeble job growth in retail trade, transportation, and professional and business services, and a decline in employment in financial services as well as information. The last category includes computing, data processing, web hosting, and related services. Thus, the tech industry, which is a major source of economic growth, was not a significant contributor to job growth in this report.
Also, the establishment survey provides data on average hourly earnings of all private sector workers, and found that, in August, average hourly earnings were up 3.1% from a year earlier—the slowest growth since May 2021. We know that, in July, the consumer price index was up 3.4% from a year earlier, which suggests that wages are not keeping pace with inflation and potentially weighing on real or inflation-adjusted purchasing power.
Despite this, spending adjusted for inflation continues to rise as households dip into their savings. Yet, with the saving rate being historically low, it is unlikely that it will go much lower. That, in turn, could imply that real spending growth may decelerate or stop in the coming months.
Meanwhile, the separate survey of households found that, in August, the labor force grew much faster than the working age population, leading to a sharp rise in the participation rate. In addition, employment (including self-employment) grew rapidly. The result was that the unemployment rate held steady at 4.1%, implying that the economy is operating at full employment.
Beth Hammack, president of the Federal Reserve Bank of Cleveland, reacted to the latest jobs report saying that, “inflation is still above 3%. The labor market is stable and near my estimate of maximum employment. Both the hard data and the anecdotes are telling me the same thing: Policy is not restrictive. Inflation is too high. And the longer it stays above our objective, the harder it will be to bring it back down.”
Also, recall that, in his speech at Jackson Hole last week, Fed Chair Warsh spoke about the strength of the US job market and also noted that inflation remains too high. Thus, an imminent tightening of monetary policy seems like the logical next step.
It has been estimated that, as of late July and August 2026, global exports of refined products were down 25% from a year earlier. In addition, it has also been estimated that 75% of that decline was attributable to either the Middle East or Russia. In the Middle East, some refining capacity was destroyed by Iran during the military conflict. Plus, refined products are unable to pass through the Strait of Hormuz. In addition, some Russian refining capacity has been destroyed or damaged by Ukrainian drones. As a result, Russian refinery output is now at the lowest level in two years. Indeed, Russia has shifted to importing refined goods.
Another factor was a temporary Chinese ban on exports of refined products. This was undertaken to stabilize domestic supplies of refined products. Although the ban has been lifted, its lagged effects remain.
The impact of the refining shortage is significant: For example, the price of jet fuel is up roughly 74% from a year ago, while the price of crude oil is up a more modest 30%. Plus, there are reports of shortages of refined products used in the manufacturing industry, including naphtha which is used to make plastics, paints, and other important inputs.
Finally, the shortage of refining capacity will likely continue to contribute to inflation and to a loss of household purchasing power in multiple countries. It is an example of how the world’s two major conflicts (in the Middle East and between Ukraine and Russia) are disrupting the global economy.