Oil prices climbing back toward $100 a barrel, combined with Middle East conflict, an artificial intelligence investment boom, and the resilience of the US economy, is fueling renewed global inflation concerns and pushing major central banks to tighten monetary policy once again. As a result, global government bonds are on track for their worst quarterly performance since 2024.

The Bloomberg Global Government Bond Index has fallen 2.1% since the end of June, putting it on course for its largest quarterly decline since the fourth quarter of 2024. That earlier slump came as Donald Trump won a second term as US president and investors braced for the inflationary pressure that could accompany more expansionary fiscal policy.

Within this global bond selloff, US Treasuries have been hit particularly hard. The yield on the 30-year Treasury note briefly broke above 5.61% on Tuesday, touching its highest level since 2002. Shorter-dated US Treasuries also came under pressure during the quarter, although some of those losses were pared after the Federal Reserve's preferred inflation gauge came in below market expectations on Wednesday.

The latest US data showed core personal consumption expenditures (PCE) prices rising less than anticipated, which temporarily eased inflation worries but did not fundamentally reverse the quarter's decline in global bond markets.

Multiple Factors Drive Up Inflation Risks as Global Central Banks Resume Rate Hikes

The ongoing Middle East conflict has pushed energy prices higher, while surging investment spending in AI and the continued strength of the US economy have led investors to reassess the global inflation outlook. Markets are increasingly worried that inflationary pressure may prove more persistent than previously expected.

Over the past three months, central banks in Australia, the eurozone, Japan, Norway, and the United States have all raised interest rates, signaling a renewed global shift toward tighter monetary policy. Michael Every, a global strategist at Rabobank, said the third quarter saw markets not only completely abandon hopes for a prolonged period of lower rates, but also entirely reverse those expectations. The key question facing markets has now shifted from whether central banks will hike again to how many more increases will ultimately be needed.

Money markets have now fully priced in expectations that the Federal Reserve and the European Central Bank will raise rates three more times over the coming year.

French Government Bonds Take a Heavy Hit as 10-Year Yield Rises to 4.8%

Among major global government bond markets, French debt has suffered the steepest selloff this quarter. With France set to hold a presidential election next year, growing political uncertainty is heightening investor concerns. With only about seven months until the vote, opposition parties and the outgoing government of President Emmanuel Macron are still struggling to reach compromises on key issues.

The yield on France's 10-year government bond has climbed 1.15 percentage points this quarter to 4.8%, marking its worst quarterly performance since the euro was officially launched in 1999. French bonds underperformed other European debt further on Wednesday. The latest data showed French inflation accelerated to its highest level in more than two years in September, adding to pressure on the European Central Bank to contain prices.

France-Germany Bond Spread Hits Highest Level Since 2012

Investors are now paying especially close attention to the yield gap between French and German government bonds, viewing it as a key gauge of stress in the European bond market. The extra yield investors demand to hold French 10-year debt rather than equivalent German bonds has now exceeded 1.2 percentage points, or 120 basis points, the highest level since 2012.

The widening spread between French and German bonds means investors are demanding greater risk compensation before they are willing to hold French government debt, reflecting growing concerns about France's fiscal and political outlook. Peter Schaffrik, a rates strategist at RBC Capital Markets, and colleagues said in a report that European government bond spreads could widen further even without fresh shocks in energy markets.

With oil prices staying elevated, global central banks turning back toward rate hikes, and fiscal and political risks rising in major economies, bond investors are facing a combination of pressures rarely seen in recent years. Market attention will now focus on whether energy prices continue to drive inflation higher and on how far the Federal Reserve and the European Central Bank will need to extend this tightening cycle.