Global bond markets experienced extreme volatility in May, with government borrowing costs surging to multi-year highs before retreating sharply as shifting expectations over the Iran war, inflation and central bank policy unsettled investors.
The turmoil, which pushed yields on long-dated government debt to their highest levels in decades in some cases, reflected heightened concerns over inflationary pressures, rising public debt and uncertainty over the trajectory of global monetary policy.
The 30-year U.S. Treasury yield climbed to around 5.2 percent on May 20, its highest level since 2007, as the US$28 trillion U.S. government bond market came under pressure from surging oil prices and stronger-than-expected inflation data.
The sell-off was triggered in part by renewed escalation in the Iran conflict, which drove crude oil prices above $110 a barrel and reignited fears of persistent global inflation.
Yields also surged across other major economies. UK long-term borrowing costs reached their highest level since 1998, while Japanese yields touched record highs and Germany’s 10-year yield climbed to its highest level since 2011.
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Market analysts said investors were increasingly concerned that inflation could remain elevated for longer than previously expected, forcing central banks to maintain tighter monetary policy for an extended period.
“The market’s concerned that inflation may be here a bit longer than we had anticipated,” said David Zahn.
However, the bond sell-off later reversed part of its gains as oil prices eased and signs emerged of progress in U.S.–Iran peace talks, while weaker economic data in Europe reinforced expectations of slowing growth.
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Eurozone economic activity contracted at its fastest pace in two and a half years in May, highlighting the strain of higher energy costs on the bloc’s economy.
“With this level of yields it’s becoming attractive for an investor,” said Nicolas Forest, adding that weakening growth was increasingly supportive for bond markets despite inflation concerns.
In the United States, however, bonds underperformed compared with European peers. Ten-year Treasury yields rose six basis points between April 30 and May 29, while German yields fell by the same margin.
Strong economic data and continued momentum in technology and artificial intelligence investment have kept U.S. growth resilient, reducing expectations for Federal Reserve rate cuts.
Traders have now largely removed bets on any rate cuts this year and briefly priced in the possibility of an additional rate hike before December, reflecting persistent inflation pressures. Recent data showed U.S. inflation rising 3.8% year-on-year in April, its fastest pace in three years.
The UK gilt market also experienced sharp swings, with 30-year yields briefly rising to 5.87 percent, their highest since 1998, amid global bond pressure and renewed political uncertainty over fiscal policy.
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Yields later eased as optimism over peace talks improved sentiment and weaker UK economic data supported expectations of future rate cuts.
Analysts said long-dated bonds were particularly affected by concerns over fiscal sustainability and inflation risk, with investors increasingly sensitive to government borrowing levels across major economies.
Bank of America analysts described U.S. Treasury weakness as partly driven by “ever-worsening fiscal dynamics,” while some market participants also raised concerns about the independence of monetary policy decisions under new Federal Reserve leadership.
Despite the volatility, some investors view higher yields as creating long-term value opportunities, particularly if global growth slows further in the second half of the year.
Still, strategists warn that markets are likely to remain highly sensitive to developments in the Iran conflict, energy prices and central bank messaging in the coming months.
