Nearly a month after the start of the war with Iran, government bond markets around the world have seen sharp changes. Surging prices for oil and natural gas have raised fears of higher inflation, leading investors to rethink what central banks might do next. As a result, yields on government bonds in both Europe and the United States have climbed steadily since the conflict began on February 28, 2026.
Bond yields rise when investors demand higher returns to compensate for greater risks. In this case, the war has badly disrupted energy markets, supply chains, and infrastructure in the Middle East. This has hurt confidence in the global economy and pushed up costs for fuel and other goods.
The movement in yields shows a classic bear-flattening pattern. Shorter-term bonds, like 2-year notes, have seen faster increases than longer-term ones, such as 10-year bonds. The front end of the yield curve reacts more quickly to expectations of tighter monetary policy, while the long end reflects worries about slower economic growth from expensive energy.
Robert Timper, Chief Fixed Income Strategist at BCA Research, told Euronews that this aggressive bear flattening points to a hawkish shift in how markets view central bank policy. “The front-end [2-year yields] is more sensitive to changes in monetary policy and has therefore risen more than the long-end [10-year yields] in response to investors’ anticipation of more hawkish central bank policy,” he explained.
Historically, this kind of curve behavior can be a warning sign. It often comes before an inverted yield curve, which many economists see as a predictor of recession.
European Bonds Hit Hardest
Europe has felt the biggest impact from the sell-off in bonds. The United Kingdom’s market has been under the most pressure. Since the war started, the 10-year UK gilt yield has risen from about 4.2% to highs above 5%, while the 2-year note jumped from 3.5% to peaks near 4.6%.
Timper noted that the UK is especially vulnerable because its inflation has stayed higher than in other countries for longer. This raises the risk that inflation expectations could become “unanchored,” making rate hikes from the Bank of England more likely.
Investment director Russ Mould at AJ Bell pointed out that the 10-year gilt yield is near 5% for only the third time since 2008. He also highlighted that the gap between gilt yields and the dividend yield on the FTSE 100 has widened, making UK stocks look relatively less attractive compared to bonds.
Other European countries have seen similar rises:
- In Germany, the 10-year bund yield moved from 2.65% to around 3%, close to 15-year highs. The 2-year yield climbed from about 2% to 2.65%.
- In France, the 10-year OAT yield rose from 3.2% to above 3.7%, nearing 17-year peaks, while the 2-year increased from 2.1% to over 2.8%.
- In Italy, the 10-year BTP yield went from roughly 3.3% to above 3.9%, and the 2-year rose from about 2.15% to 3%.
Across these markets, 2-year yields have consistently risen faster than 10-year ones. Even longer maturities, such as 20- and 30-year bonds, have moved higher, signaling weaker confidence in long-term economic growth in Europe.
US Treasuries Also Under Pressure
In the United States, Treasury yields have followed a similar path, though the increases have been somewhat milder than in the UK. The 10-year note yield has climbed from around 3.9% to a peak of 4.4% earlier this week and currently sits near 4.37%. The 2-year note has risen from 3.35% to highs above 4%, now hovering around 3.9%. Both have reached 8-month highs.
Timper sees US bond moves as broadly in line with those in the euro area, given similar inflation backgrounds and policy outlooks. So far, there has been little sign of a major “flight to safety” where investors dump European bonds to buy US Treasuries.
He added that any such shifts would likely show up more clearly in currency markets, where the US dollar often strengthens because it is the main currency used for energy trade.
A New Outlook for Inflation and Policy
Overall, the message from bond markets on both sides of the Atlantic is clear: the conflict in the Middle East has dramatically changed the near-term picture for inflation, interest rates, and borrowing costs. Higher energy prices are feeding inflation fears, making central banks less likely to cut rates quickly — or even raising the chance of hikes in some places.
While longer-term growth concerns remain, the immediate pressure comes from the inflationary shock caused by the war. Markets are now pricing in a more cautious and potentially tighter policy response from central banks in the months ahead.
This repricing reflects the broad uncertainty still hanging over the global economy almost a month into the Iran war. Investors will be watching energy prices, central bank signals, and developments on the ground closely in the coming weeks.
