New york: Global bond markets experienced substantial selling pressure during the first half of the year as geopolitical tensions escalated in the Middle East, beginning in late February. This unrest led to increased oil prices and inflation concerns, significantly limiting the flexibility of monetary policy.
According to Anadolu Agency, the broader implications of the US-Israel-Iran conflict resulted in significant market fluctuations. The disruption in tanker traffic through the Strait of Hormuz, along with rising insurance costs and heightened supply worries, led analysts to anticipate further inflationary pressures. Prior expectations of central banks implementing rate cuts before the war were swiftly replaced with forecasts of more aggressive monetary measures.
Initially, the Federal Reserve was expected to reduce rates twice throughout the year. However, the uncertainty brought about by the conflict shifted these predictions, with markets now almost certain that the Fed will increase rates at least once before the year's end. In the first half of the year, the US 5- and 10-Year Treasury yields rose by 50 basis points to 4.23% and by 30 basis points to 4.47%, respectively.
The US 5-Year Treasury yield peaked at 4.35% on May 19, marking its highest point since February 2025, while the 10-Year yield soared to 40.69%, the highest since January 2025. In Europe, concerns over energy supplies influenced the inflation outlook, prompting the European Central Bank (ECB) to adopt hawkish policies. At its June 2025 meeting, the ECB cut its three key interest rates by 25 basis points, maintaining this policy stance in the 11 meetings afterward.
Last month, the ECB increased rates by 25 basis points, highlighting rising inflation risks in the region. This rate hike was the first since September 2023 and marked a significant response to the war-induced rise in energy and oil prices. ECB President Christine Lagarde remarked during the Portugal forum's policy panel on July 2 that global economic risks are now more balanced and that the stagflationary environment is no longer a concern.
The eurozone's annual inflation increased from 2% in December 2025 to 2.8% last month. Germany's 10-year bond yield remained stable at 2.86% in the first half, while the UK's 10-year bond yield rose approximately 32 basis points to 4.8%. Germany's 10-year bond yield reached 3.19%, its highest since May 2011, and the UK's 10-year bond peaked at 5.18%-the highest since July 2008.
Similar trends were observed in Asian bond markets. The Japanese yen depreciated against the US dollar, dropping to 161.9, its lowest in 40 years, intensifying selling pressure in the bond market and amplifying inflation risks in the country. Japan's 10-year bond yield climbed to 2.85%, its highest since 1997. Meanwhile, China emerged from the deflationary zone through the cost channel, with a buyer-driven trend emerging in the first half, as the country's 10-year bond yield decreased 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 forced central banks to maintain a tighter stance. He noted, "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." However, he cautioned that any significant increase in oil prices could drive yields higher again, as renewed inflation concerns might prompt central banks to adopt an even more hawkish approach.