Global bond sell-off deepens as Strait of Hormuz closure keeps borrowing costs elevated

Markets are continuing to price in higher borrowing costs for governments as tensions in the Middle East keep energy prices elevated. The latest analysis says the closure of the Strait of Hormuz and renewed hostilities between the United States and Iran are feeding expectations of higher inflation and interest rates across major economies. That has added fresh pressure to government bond markets already under strain from heavy issuance and persistent fiscal concerns.

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The report says the immediate market response is being driven by the assumption that oil and gas prices will stay higher for longer, rather than ease as some investors had expected. It adds that countries now face multi-decade-high borrowing costs, with markets signalling that governments will have to pay more to raise cash. The same bond markets are also absorbing a surge in corporate borrowing, including more than $219bn in debt issued this year by major technology firms such as Google, Amazon and Meta for artificial intelligence infrastructure.

That matters because higher yields raise the cost of financing public debt and can narrow the room available to governments already under pressure from spending commitments and slower growth. The analysis also points to Japan as another major borrower facing rising yields, with its government bond rates reaching 30-year highs as inflation and monetary policy shift. Together, these trends suggest a broader change in the global flow of money, with competition for capital pushing up the price of borrowing for states as well as companies.

The Middle East backdrop remains central to the market move. The report says markets had previously assumed tensions would ease and energy prices would fall, but that has not happened. Instead, investors are now pricing in a chronic Gulf crisis, higher inflation for longer and a prolonged period of elevated interest rates in the world's major economies.

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That combination is particularly sensitive for governments that must refinance large debt piles while trying to keep budgets under control. What remains unclear is how long the Strait of Hormuz will stay closed and whether the US-Iran confrontation will intensify further. Investors will be watching for any shift in energy prices, central bank guidance and signs that borrowing conditions are stabilising.

The next test for markets is whether the current rise in yields proves temporary or becomes a more lasting feature of global financing conditions.

Government bond markets came under renewed pressure on Wednesday as investors sold debt across major economies, pushing UK borrowing costs to their highest level since mid-2008. In London, the yield on 10-year UK government bonds rose to just below 5.3% in early trading. The move came as markets reacted to renewed exchanges between the United States and Iran and to a rise in oil prices.

The sell-off has been driven by concern that higher energy costs could feed inflation and force central banks to keep interest rates elevated for longer. Brent crude was trading at about $95 a barrel amid the latest fighting in the Middle East. The United States launched new airstrikes on Iranian targets overnight, prompting counterstrikes by Tehran against American interests in Gulf allies, according to the supplied material.

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The rise in gilt yields adds to pressure on the UK government's borrowing plans and on the fiscal room available to the chancellor ahead of the 28 October budget. Analysts cited in the supplied material said higher yields since the start of the Iran war may have wiped out almost half of the headroom against the government's fiscal rules. Economists at Deutsche Bank estimated that the £26bn margin created at the spring forecast could fall to less than £14bn by the time of the budget.

That matters because higher yields increase the cost of financing public debt and can narrow the choices available to ministers. The situation is particularly sensitive in the UK, where the government is already facing pressure over spending commitments and the need to fund higher defence costs. Market moves in government bonds also matter beyond Britain because they can influence borrowing conditions, inflation expectations and central-bank policy across major economies.

The latest move followed a broader wave of selling in global bond markets in recent days, with investors also reacting to fears about inflation and spiralling deficits. The supplied material said Asian stock markets fell sharply as the sell-off resumed, with Tokyo's Nikkei 225 down 2.85%, China's CSI 300 down 1.4% and South Korea's Kospi down 3.3%. That suggests the market reaction is not confined to one country or one asset class.

What remains unclear is how long the pressure on bonds will last and whether the latest Middle East escalation will continue to drive oil prices higher. Investors will be watching for further developments in US-Iran tensions, any response from central banks, and signs of how much fiscal headroom remains before the UK budget. The next key test for markets is whether borrowing costs stay near current levels or ease if geopolitical risks subside.

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