Global inflation intensifies the bond market storm, shaking the foundation of the stock market bull run—“Now everything depends on oil.”

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A panic caused by an inflation shock triggered by the Iran war is reshaping the global interest rate landscape. Long-term government bond yields in the US, Japan, and UK surged synchronously this week, repeatedly hitting multi-year and even historical highs, posing the most direct rate threat to the months-long stock bull market. Meanwhile, the deadlock in the Strait of Hormuz remains unresolved, and international oil prices keep rising, intensifying the destructive power of this storm.

The US 30-year Treasury yield closed at 5.12% this week, the highest closing level since July 2007, with a weekly gain of nearly 20 basis points; Japan’s 30-year bond yield broke above 4%, a record high; and the UK’s 30-year bond yield rose to 5.85%, the highest level this century. The US government sold 30-year bonds at a 5% yield for the first time since 2007. After two consecutive strong inflation releases, traders are now betting the Fed’s next step will be a rate hike rather than a cut, with the probability of a hike this year rising to about 50%.

Brent crude oil settlement price surged more than 3% to $109.26 per barrel on Friday, with a cumulative increase of 50% since the eve of the US and Israeli attacks on Iran. The S&P 500 fell 1.2%, the Nasdaq Composite fell 1.5%, and the STOXX Europe 600 fell 1.5%.

The pressure faced by the market right now reflects an increasingly expensive logical dilemma: The months-long bull market is built on an increasingly demanding premise — can assets with already high valuations continue to rise in an environment of higher borrowing costs and soaring energy prices? Whether Friday’s volatility marks another brief correction or the start of a broader repricing that the market has repeatedly postponed remains undecided.

Bond Market Storm Sweeps Globally

The danger of this round of bond market volatility lies not only in the magnitude of yields rising, but also in the high degree of synchronicity across major global markets.

The US 10-year Treasury yield rose 11 basis points to 4.59% on Friday, breaking through the widely recognized psychological barrier of 4.5% and approaching a one-year high. The UK 30-year bond yield jumped about 20 basis points in a single day to the highest level since 1998, in part because the market began pricing in a potential intra-party challenge to Prime Minister Starmer, plus the ongoing expansion of UK national debt, jointly driving up UK bond risk premiums.

Japan’s 30-year bond yield broke through the historical threshold of 4% for the first time after stronger-than-expected inflation data came out. Long-term bond yields in Germany, Spain, Australia, and other markets also rose synchronously, and G7 finance ministers are reportedly set to discuss this round of sell-offs.

"The past week was a perfect storm for the rates market — high inflation data, plus the global rate rise led by Japanese and British government bonds... I think this round of rate hikes will begin to tighten financial conditions as economies respond to ongoing energy shocks," said Priya Misra, portfolio manager at JP Morgan Asset Management.

Inflation Expectations Rekindled, Fed Rate Hike Bets Heat Up

This week’s US wholesale inflation data was the worst since 2022, completely reversing the market’s expectations for the Fed’s policy path.

According to CME Group data based on Fed funds futures, the market now expects about a 50% chance of a Fed rate hike this year. One-year and one-year-forward US inflation swaps — derivatives measuring inflation expectations for the 12 months a year from now — rose to their highest since February 2025 on Friday.

A Bank of America fund manager survey on Friday showed fund managers are "increasingly uneasy" about US inflation upside risks, with a quarter of respondents believing the Fed is most likely to hike rates beyond current market expectations among major central banks. Tom Ross, head of high-yield bonds at Janus Henderson Investors, said Friday’s "strong repricing" of global bond yields partly reflects "market increasing confidence that inflation risk may ultimately dominate the policy outlook." "Inflation is quickly becoming the risk to watch," he said.

Priya Misra further warned in a Bloomberg TV interview that once the 10-year Treasury yield breaks 4.5%, "it will become dangerous not only for the bond market, but for all risk assets," and the market narrative could shift from "This is just an inflation issue" to "Does this mean stagflation?"

"Now Everything Depends on Oil"

Behind the bond market storm, the energy crisis is another driver, and its trajectory is highly uncertain.

During the Strait of Hormuz blockade, worries about global oil supply shortages intensified, with little progress in negotiations on all sides.

Brent crude oil settlement price surged more than 3% to $109.26 per barrel on Friday, with a cumulative rise of 50% since the eve of the US and Israeli attacks on Iran.

Barclays’ head of European equity strategy, Emmanuel Cau, said bluntly: "Now everything depends on oil. If oil prices don’t drop, the market can’t rise."

Stock Bull Market Looks Strong, But Is Weak Inside

Despite obvious selling pressure on Friday, US stocks logged their seventh consecutive week of gains, but this winning streak masks deep internal divergence.

Eight out of the eleven S&P 500 sectors posted monthly declines, with gains highly concentrated in information technology. The strength of tech stocks creates a strong overall index performance, but most sectors are quietly weakening. Credit markets remained stable until Thursday, supported by robust corporate earnings and strong primary demand, with investment-grade and high-yield spreads staying firm—but this doesn’t mean risks have disappeared.

Lori Calvasina of RBC Capital Markets warned in a report that if the US 10-year Treasury yield hits 5%, the bullish argument for US stocks will be challenged; this level has historically compressed equity valuations many times. Citi’s head of rates, Deirdre Dunn, also said if the yield sell-off is big enough, default rates could rise and transmit to equities. "I’m not waiting for equities to collapse because of the rates market, but the risk is real, especially at current high valuations," she said.

Meanwhile, retail investor enthusiasm remains high. According to Goldman Sachs trading desk data, market trading volume is up 28% since mid-April, with a Goldman basket tracking retail-favored stocks up about 30% since early April. Bloomberg reported that Bank of America’s private client stock allocations rose to a record 65.7%, while cash allocation fell to a historic low of 9.8%.

Bulls and Bears Diverge: Same Market, Different Stories

Faced with the apparent divergence between the bond and stock markets, the divide between bulls and bears is intensifying.

Steve Chiavarone, Deputy Chief Equity Investment Officer at Federated Hermes, thinks current asset class pricing isn’t contradictory, but reflects different time horizons. "Oil prices and bonds are pricing short-term supply shortages and stickier inflation, with a three-to-six month timeframe; AI stocks are pricing mid-term productivity gains and declining inflation, with a one-to-three year timeframe," he said, adding the current strength in corporate earnings revisions is the strongest he’s seen in 20 years.

Skeptics disagree with this logic. "Each major asset class tells a self-consistent story, but they’re not telling the same story," said Gene Goldman, Chief Investment Officer of Cetera Financial Group. "Either stock valuations will contract, or the bond market will have to rethink just how much tightening the Fed needs."

David Lebovitz of JP Morgan Asset Management also pointed out that when inflation becomes the dominant risk, bonds can no longer hedge stocks, and his firm prefers to hold real assets like real estate and infrastructure. Marija Veitmane, head of equity research at State Street Global Markets, believes tech is the only sector in the current market with strong long-term demand support. "Ample funds in the market are rushing into tech, lifting prices—but this is not the case for other sectors."

The bull market continues, but the cost of sustaining it is rising. The bond market’s action this week shows that the optimistic narrative underpinning multi-asset rallies is getting more and more expensive.

Risk Warning and DisclaimerMarket risk exists; investment must be cautious. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article suit their particular situation. Investing based on this is at your own risk. ```