Global bond markets are facing sustained pressure, with yields climbing broadly as fiscal deficits in major economies, energy supply worries from US-Iran tensions, and a hawkish tilt in central bank policy expectations all weigh on investor sentiment, threatening to cap equity valuations worldwide.

Policy Rate Expectations Repriced as Neutral Rate Estimates Rise

Idanna Appio, portfolio manager and senior research analyst at First Eagle Investments, said in an interview that markets are broadly revising up expectations for short-term interest rates in the US and globally, while investors are also gradually lifting their estimates of the neutral policy rate, or R-star. Recent remarks from former Federal Reserve governor Kevin Warsh have contributed to a notable tightening in market expectations: economists at Barclays and Societe Generale have both adjusted their baseline forecasts, now seeing a possibility of additional rate hikes from the Federal Reserve this year. Meanwhile, overnight index swaps (OIS) imply a roughly 92% probability of a Bank of Japan rate hike in September, with October fully priced in. In Australia, traders have ramped up tightening bets after stronger-than-expected inflation data, with markets now anticipating a possible fourth rate hike from the Reserve Bank of Australia this year.

Fiscal Expansion and Geopolitical Risks Push Up Term Premiums

For months, sovereign debt supply from major economies and geopolitical risks have lifted the term premium demanded on long-dated bonds. High fiscal deficits across the US, Japan, the UK, and France have intensified the challenge of absorbing longer-dated supply, with the US 30-year Treasury yield having nearly erased all of the decline that followed Treasury Secretary Scott Bessent's announcement last month to expand bond buybacks. In the Middle East, renewed US-Iran conflict is expected to persist for several months, fueling concerns about prolonged disruption to energy shipments through the Strait of Hormuz, which is pushing oil prices higher and adding to inflation stickiness. Strategist Mark Cranfield noted that G10 fixed-income traders are now tracking Japanese government bonds more closely, with Australian bond movements increasingly benchmarked to JGBs rather than Treasuries alone. Given persistent inflation and the broad fiscal deficits in the US, Japan, the UK, and France, the near-term backdrop is extremely challenging, and it is unsurprising that Australia's 10-year yield has climbed to its highest level since 2011.

Cross-Asset Spillover and Seasonal Headwinds

The surge in global long-end yields is creating ripple effects across asset classes. The Bloomberg Global Aggregate Bond Index has fallen 0.9% so far this year, after gaining 6.8% in 2025, with Australia's 10-year yield hitting multi-year highs even as Japan's 10-year auction demand this week matched its 12-month average. Rising bond yields are eroding the valuation appeal of equities relative to risk-free assets, pressuring the AI-led global stock rally, with the MSCI World Index having pulled back roughly 1% from its mid-August record high. Seasonality also points to further weakness: Bloomberg-compiled historical data show September and October are typically the weakest months for the global bond index, with average monthly declines exceeding 1% over the past decade, suggesting that near-term selling pressure in bond markets may not ease substantially in the coming weeks.