The global economy has a new challenge to surmount: an unruly bond market that is sending borrowing costs to their highest levels in decades.

A rout in bond markets deepened Tuesday when Japan's 10-year bond yield touched 3% for the first time since 1996. Markets in other heavily indebted nations had their own superlatives. The U.K's 30-year bond yield hit the highest level since 1998. Bond yields in Germany and France rose to their highest levels in more than a decade. The 10-year U.S. Treasury yield edged closer to 4.8%, a level last touched in January 2025.

The runup in interest rates has profound consequences for the global economy, heaping pressure on everyone from home buyers to credit-card holders and especially governments, which have borrowed heavily in recent years.

The bond selloff has been building for weeks and reflects a number of drivers. A jump in oil prices this week after fighting resumed in the Persian Gulf was the latest catalyst. When energy prices rise and feed through to the economy, bond investors demand higher yields to compensate for higher inflation.

Heavily indebted countries-including the U.S.-have been hit hardest. This reflects investor concerns about a potential debt spiral, in which higher yields drive up the cost of refinancing existing debts, requiring even more borrowing. A flood of bonds issued by U.S. tech companies to pay for the artificial-intelligence boom is also pushing yields higher by eating into demand for government debt, investors say.

The surge in bond yields comes despite efforts by finance ministers to calm the markets while assembled as guests of Treasury Secretary Scott Bessent at the G-20 meeting in Asheville, N.C.

Stock markets have mostly shrugged off the bond selloff so far, though indexes fell on Tuesday. Some are betting that a sustained rise in bond yields could prick what many see as a bubble in AI-driven stocks.

"We're in the danger zone already," said Derek Halpenny, European head of global markets research at MUFG. He said the higher interest rates go, the risk increases of a disruptive stock-market unwind.

Central banks are shifting to a more aggressive approach to fighting inflation as the war in the Middle East drags on and energy prices climb again. Federal Reserve Chairman Kevin Warsh's speech on Friday offered investors the latest evidence that central bankers don't think the battle against inflation is over.

Investors have raised bets that the Fed will raise rates this month-and be joined by several other central banks. Markets are pricing in rate-increases in the coming weeks from the European Central Bank, Bank of Japan and the central banks of Australia and New Zealand.

But bond markets aren't waiting for central banks to act.

"The situation in the Middle East remains unresolved and oil prices are creeping back higher, which in turn means that there's a risk that inflation will continue to overshoot central bank targets," said Christopher Iggo, a strategist at BNP Paribas Asset Management. "As a result, central banks may have to raise interest rates."

Global oil prices have climbed about 5% over the last month, sending benchmark Brent crude back above $92 a barrel. Natural gas prices overseas have also jumped to multiyear highs as European and Asian buyers scramble for a smaller supply of LNG shipments.

Japan's bond market has been swept by one of the most aggressive selloffs this year, with yields on its benchmark 10-year note rising to 3% from around 2% in January.

After decades battling deflation, inflation is now on the rise in Japan. The Bank of Japan has been slow to increase interest rates, which has been weighing on the value of the yen.

Investors believe it will soon pick up the pace of tightening. Bessent on Monday helped reinforce those bets.

"It's my belief that the Japanese government and the BOJ will do the things that will lead to a stronger yen," Bessent said on CNBC.

Markets now expect the BOJ's rate to end the year at around 1.4%, while three months ago investors had expected the central bank to keep its key rate on hold at 1% all year. Rising borrowing costs are also driving up the cost of refinancing Japan's debt load as Prime Minister Sanae Takaichi ramps up spending.

To be sure, the moves in the bond market have been relatively orderly and have yet to trigger a broader selloff in currencies, stocks and other asset classes.

Ben Kizemchuk, a Toronto-based portfolio manager at Wellington-Altus Private Wealth, said Japanese yields are coming into greater alignment with those in the U.S. and Europe.

"It's more like a global repricing of sovereign debt," Kizemchuk said. "Markets are beginning to price in a world where economies are converging."

Rising yields are leading investors like Florian Ielpo, a portfolio manager at Lombard Odier Investment Managers, to rethink their investment strategies that give greater weight to stocks over bonds.

As yields rise, the steady income of bonds becomes more attractive compared to risky stocks. He still prefers stocks for now, but his mind is beginning to change.