Government bond yields worldwide are climbing, driven by a surge in energy prices due to Middle East conflicts, leading traders to bet that central banks may raise interest rates.

U.S. Treasury yields have reached their highest levels in months, following a third consecutive week of declining bond prices, amid market speculation that the Federal Reserve may need to increase rates to combat inflation.

On Monday, Australia’s 10-year government bond yield rose to its highest level since 2011, while New Zealand’s bond yields hit a peak not seen since May 2024. Yields on Japanese and South Korean government bonds also advanced, and European bond futures declined.

Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle Investments, remarked, "The market is in disarray; the prevailing sentiment is to sell first and ask questions later."

Growing concerns over an escalation in the Iran conflict, which pushed crude oil prices higher, contributed to U.S. Treasuries joining the global bond selloff last week. Both the Bank of England and the European Central Bank have indicated that tighter monetary policy may be necessary. Federal Reserve Chair Jerome Powell emphasized that more progress on inflation is needed before considering another rate cut.

Last week, the U.S. Treasury yield curve flattened, with the 2-year yield rising 18 basis points to 3.90% and the 10-year yield increasing 10 basis points to 4.38%. Since the outbreak of hostilities, the 10-year yield has climbed more than 40 basis points.

Just last month, investors fully anticipated two Fed rate cuts this year, expecting labor market weakness. However, as the Iran conflict persists, interest rate swap data show traders now pricing in roughly a 40% chance of a rate hike by October.

The situation in Iran remains a key focus for investors this week. Iranian Parliament Speaker Mohammad Bagher Ghalibaf stated on social media that financial institutions purchasing U.S. Treasuries and their assets could be considered "legitimate targets."

Justin Lin, an investment strategist at Global X ETFs Australia, noted, "This is less about a genuine escalation and more a clear signal that we remain far from any credible ceasefire or resolution."

Beyond monitoring Middle East tensions, investors this week will also pay close attention to remarks from Federal Reserve officials, including Governor Michael Barr and Vice Chair Philip Jefferson. Auctions of 2-year, 5-year, and 7-year Treasury notes will further test investor demand following the recent spike in yields.