Global government bond yields rose to multiyear highs before losing some steam in late Tuesday U.S. trading as investors grappled with rising economic uncertainty.
The 30-year U.S. Treasury yield rose to 5.333% in overnight trade, before receding to 5.284%, still close to its 2007 highs.
Shorter-term yields gave up early increases and fell below Monday's levels. The 10-year Treasury yield traded at 4.704% and the two-year at 4.171%. The 10-year German Bund yield was at 3.256%, down from 3.263%, which was the highest level since 2011.
Yields on 10-year Japanese government bonds also hit a 30-year high of 2.955%, while the 30-year U.K. gilt yield hit a three-month high of 5.858%.
Bonds sold off, sending yields higher, because investors demanded a higher payout to lock up their money in securities maturing well into an increasingly uncertain future, said Jamie Patton, a fixed-income portfolio manager and co-head of global rates at asset manager TCW.
"If you lock your money up for 30 years in nominal bonds...there's a higher risk that there will be more inflation in the future...there's that chance that you need to be compensated for when you buy long bonds," she said.
Market euphoria around AI is also a contributor, Patton said.
"If market participants are expecting to make 10% on their stocks, they probably need to be paid much more than 5% on their long bonds," she said.
Yields may have room to rise further, even if the U.S. Federal Reserve keeps interest rates unchanged, instead of raising them as markets have been expecting.
"Softer growth, continued disinflation and eventually easier Fed policy could pull yields back, particularly at the front end," said Daniela Hathorn, market analyst at Capital.com. "But the long end still faces heavy Treasury supply, large fiscal deficits, AI-related corporate issuance and uncertainty around energy and inflation."
The picture is different in the shorter term. Tuesday's auction of Treasury bills maturing in six weeks showed steady demand. A 20-year bond auction is scheduled for Wednesday, followed by a tender of inflation-protected 30-year TIPS securities on Thursday.
The auctions are likely to test investors' confidence, as the U.S.-Iran conflict in connection with the Strait of Hormuz makes crude prices more volatile than usual.
An initial 60-day Memorandum of Understanding between the U.S. and Iran has expired without meaningful improvement in shipping conditions in the Strait of Hormuz, while President Trump has recently threatened to bomb Oman, alleging the country might be standing in the way of an agreement with Iran.
"The worsening situation in the Middle East is likely a factor in intensifying concerns over inflation and concerns over the U.S. fiscal position," said Derek Halpenny, head of research for global markets EMEA at MUFG.
The spiraling debt outlook from funding the war and concerns about "Washington's lack of fiscal discipline" are weighing on bonds too, First Abu Dhabi Bank's chief economist said Simon Ballard said in a note.
Oman borders the Strait of Hormuz in the south and is in talks with Iran to allow more commercial traffic in the waterway.
WTI crude rose 0.5% Tuesday to $84.94 a barrel and Brent rose 0.2% to $91.02, having traded below $80 in early August.
"Rising energy prices amid resilient macro data amplify headwinds for bond markets after key levels were taken out," Christoph Rieger, head of rates and credit research at Commerzbank, said in a note. "It is difficult to see a swift change of dynamics in the current environment."
President Trump's indication that he was not inclined to extend the expiring agreement with Iran "has added to concern that diplomatic off-ramps are narrowing," while the strait remains the key risk channel, Tickmill Group market strategist Patrick Munnelly said.
The pressure is no longer confined to U.S. Treasurys, with bond yields rising to multiyear or multidecade highs across Asia and Europe.