U.S. Treasury yields rose across the curve, with the 30-year up nearly 3 basis points to 5.335% — the highest level since 2002. The 20-year Treasury note hit a post-2006 high, while the benchmark 10-year yield reached 4.748%, its steepest since 2007. The sell-off extended well beyond American shores, with German, French, Japanese, British, Italian, Swiss, and Canadian government bonds all pushing toward or past milestones not seen in decades.
Strait of Hormuz Closure Keeps Oil Elevated
The immediate trigger for Tuesday’s rout was the failure of Washington and Tehran to reach a diplomatic breakthrough. President Donald Trump on Monday ruled out extending a ceasefire, and Iran responded with fresh threats of military escalation. Both governments rejected further peace talks.
Overnight, a projectile struck a cargo vessel transiting the Strait of Hormuz — a reminder that the critical shipping artery has stayed effectively closed throughout the nearly six-month conflict. The strait’s shutdown has pushed energy and commodity costs higher, with Brent crude futures holding above $90 a barrel on Tuesday.
Jim Reid of Deutsche Bank told clients that while no single catalyst drove the bond market declines over the past 24 hours, the absence of any U.S.-Iran deal meant investors priced in a more extended closure of the Strait of Hormuz. “Investors are pricing in a more protracted period of higher oil prices again,” he wrote. “As investor concern mounted about a longer closure for the Strait of Hormuz, that put pressure on fixed income, particularly longer-dated sovereign bonds.”
AI Infrastructure Emerges as a Second Hyper Borrower
Beyond geopolitics, a structural force is also reshaping bond markets. Carl Weinberg, founder of High Frequency Economics, told CNBC’s “Squawk Box Europe” that massive capital deployment into AI infrastructure is competing with governments for the same pool of global savings.
Weinberg estimated that up to $600 billion in borrowing has funded AI-related buildout over the past year — spanning technology, utilities, and supporting infrastructure — with an additional $200 billion in new issuance and IPOs already in the pipeline. That capital draws from the same savings that finance government deficits and ordinary business investment.
“They’re borrowing so much money that I believe … they and the government together are crowding out investment by small businesses, and that’s what’s driving up bond yields,” Weinberg said. He added that the effect is global: capital flows from other countries into the United States to fund AI expansion, subtracting savings from those economies and pushing their government bond yields higher as well.
Bond Yields Climb as Investors Seek Duration Compensation
Dan Coatsworth, head of markets at AJ Bell, noted in a Tuesday morning briefing that failed diplomatic efforts have put inflation fears and potential interest rate hikes at the forefront of investor thinking. But he cautioned against attributing the entire move to rate expectations.
“Rising long-dated bond yields are not driven solely by expectations of higher interest rates and inflation fears,” Coatsworth said. “They can also reflect concerns around high levels of government borrowing and investors demanding greater compensation for the risks of holding long-dated government bonds.”
The international scope of Tuesday’s sell-off underscores that point. Germany’s 10-year bund yield traded at a 15-year high, while France’s equivalent reached its highest since 2008. Japan’s 10-year yield climbed to 2.941%, surpassing the 30-year high set earlier this year. Moves were similarly sharp across the British, Italian, Swiss, and Canadian curves.
What Happens Next
With both Washington and Tehran rejecting further negotiations, the Strait of Hormuz is likely to remain effectively closed for the foreseeable future, keeping upward pressure on oil prices and inflation expectations. Central banks that had been moving toward rate cuts may now face a more complicated calculus if energy costs feed through into consumer prices.
The AI capital cycle shows no sign of slowing. If Weinberg’s $200 billion pipeline materializes, competition for savings between sovereign issuers and AI enterprises will intensify, potentially keeping Treasury yields elevated even if geopolitical tensions eventually ease. Investors should watch upcoming Treasury auctions and sovereign issuance calendars for signs of demand stress, as well as any shift in AI-related capital expenditure guidance from major technology firms.
— Nadia Okonkwo, business desk, AXO News