Early Thursday, the yield on the U.S. 30-year Treasury briefly surged to 5.45%, marking its highest level since 2004, as the ongoing selloff continued to push bond yields higher across the globe.

This week, bond yields have jumped sharply, hitting new year-to-date highs one after another. On Wednesday, S&P Global data showed that U.S. business activity was strong in September, but energy prices drove inflation higher, triggering a massive bond market selloff. Thursday's action was a continuation of that trend.

The economic data prompted traders to increase bets that the Federal Reserve will raise interest rates further to curb inflation. According to the CME FedWatch Tool, traders now price in a 64% probability of a Fed rate hike in October, compared with just 11% a month ago.

The 10-year Treasury yield, a key market benchmark, climbed to 5.15% early Thursday, setting a new year-to-date high and the highest level since 2007. By 9:50 a.m. Eastern Time, the yield had pared some gains and was flat on the day; despite the brief respite, it remained in a multi-year high range.

Bond yields serve as the pricing benchmark for all types of interest rates across the economy. When yields climb to multi-year highs, borrowing costs for consumers, businesses, and governments rise accordingly. Oil prices rose on Thursday, with Brent crude trading around $105 per barrel, further intensifying inflationary pressure and pushing yields higher.

The rise in yields has become a global phenomenon: 10-year government bond yields in France and Germany climbed to their highest levels since 2008; Japan's 10-year government bond yield rose to 3.08%, the first time that level has been seen since 1996.

Falling bond prices correspond to rising yields. Traders are beginning to adapt to expectations of central bank rate hikes, and bonds have been heavily sold off, disrupting global bond markets and driving yields higher. Nigel Green, CEO of deVere Group, said in a research note: "Major bond markets around the world are under pressure simultaneously."

At the start of the year, some Wall Street analysts had expected the Fed to have room to cut rates this year. But the energy shock from the Iran conflict, combined with stronger-than-expected U.S. economic resilience, completely reversed market expectations. The 2-year Treasury yield, which reflects Fed policy expectations, has climbed from 3.48% at the start of the year to 4.87% this month.

The closure of the Strait of Hormuz caused energy prices to skyrocket, reigniting global inflationary pressure and shifting the policy focus of central banks toward prioritizing rate hikes. Green said: "All investors betting on a global easing cycle have seen their expectations dashed."

Of course, traders' bets on central bank policy will shift with the outlook for oil prices and the situation in the Middle East conflict. If the market lowers its expectations for central bank rate hikes, yields could pull back. But some analysts say long-term government bonds will still be driven by factors such as economic growth and inflation, and yields are likely to remain at multi-year highs for some time.

Rising yields also drive up the cost of mortgages, auto loans, and corporate borrowing, adding to the economic burden across society. On Thursday, the U.S. Treasury will conduct a second round of expanded Treasury buybacks, planning to repurchase up to $6 billion in long-term Treasuries. The buyback program was first announced in August. Treasury buybacks could help smooth the rise in yields, but even with the program in place, yields have continued to climb; investors believe fundamental factors mean long-term high yields will persist for a longer period.

Stocks fell in tandem: the S&P 500 dropped 0.3%, and the Nasdaq Composite fell 0.7%. Rising bond yields continued to pressure the stock market, and U.S. equities weakened further after closing lower the previous trading day.