Government borrowing costs continued to climb to levels not seen in decades on Tuesday, as prospects for an end to the US-Iran war diminished. Concerns regarding the inflation outlook intensified after the ceasefire between Washington DC and Tehran concluded on Monday night without a resolution, and no progress was made on reopening the Strait of Hormuz.
Donald Trump's threat to bomb Oman if they "get in the way" of negotiations contributed to a rise in oil prices, pushing them above $91 a barrel on Tuesday. Investors are concerned that higher energy prices could fuel inflation, potentially leading to increased interest rates.
Fiscal pressures are also growing due to governments increasing defence spending, which is anticipated to drive higher borrowing in major European nations such as Germany and the UK. The yield on the 30-year US Treasury bond reached 5.324% on Tuesday, its highest level since June 2007. The UK's 10-year gilt yield rose by 2.6 basis points to 5.076%, while Germany's 10-year bond yield reached its highest point since 2011.
Dan Coatsworth, head of markets at AJ Bell, stated that rising long-dated bond yields are influenced by expectations of higher interest rates, inflation fears, and concerns about high levels of government borrowing. Neil Wilson, a Saxo UK investor strategist, added that fixed income investors are becoming nervous about various factors, including inflation, the Iran conflict, and fiscal worries, with government and corporate issuance also playing a role.