Bond yields surge and stocks tumble as inflation fears ripple through markets

Oil prices surged Tuesday after the U.S. military announced further strikes against Iran, deepening inflation concerns and extending an earlier market sell off in stocks and bonds.

The global Brent crude oil benchmark climbed nearly 4% to $94 a barrel, while U.S. crude prices climbed more than 4% to more than $89 a barrel.

At midday, the S&P 500 had dropped 0.65%, while the tech-heavy Nasdaq fell 0.86%.

The yield on the 10-year Treasury note, which represents the return investors demand for lending money to the U.S. government for a decade, hit its highest level since January 2025, rising to about 4.79%.

Stocks and bonds had already come under pressure earlier in the day from a global bond selloff and fears that an interest-rate hike this month by the Federal Reserve would tamp down economic growth.

Fed Chairman Kevin Warsh indicated last week that the central bank is uncomfortable with the current rate of inflation, remarks investors interpreted to mean the Fed will likely raise its key interest rate in response. Warsh said business investment, led by AI spending and consumer demand, remain brisk.

The 10-year yield serves as the benchmark borrowing rate for most common consumer lending in the U.S. economy — mortgages, auto loans and credit card debt. That means average consumers are likely to face higher borrowing costs in the weeks and months ahead.

The rise in U.S. yields Tuesday paralleled similar moves around the world which were even more severe. Japanese benchmark bond yields hit a record high, while 30-year U.K. government bonds notched their highest level since 1998.

The tandem market actions reflect similar issues playing out across developed nations: widening deficits, rising debt loads and tight global oil supplies are all contributing to higher inflation.

At the same time, investors’ appetite for riskier assets, like stocks, continues to climb. That makes government bonds — which are seen as “safe haven” assets due to their guaranteed payout structure — relatively less appealing, putting further upward pressure on their yields.

Not all market observers believe that yields are rising for “bad” reasons like rising inflation risks, however.

Matthew Klein, author of The Overshoot newsletter, argues i n a new note that rising government bond yields are, on balance, a sign of reinvigorated economic health after more than a decade of sluggish growth.

Led by investments in artificial intelligence alongside increased government spending, the U.S. and developed economies writ large have entered a new stage of growth, he writes, one that makes government bonds relatively less attractive investments compared to stocks.

“Today’s rates are obviously too high only if inflation and growth are both poised to slow sharply from here,” writes Klein. “That is certainly possible, but it would (probably) only happen if the U.S. fell into a downturn.”

In other words, if yields started to fall again, it could signal an economic slowdown.

Treasury Secretary Scott Bessent dismissed concerns about rising bond yields Monday, arguing that, measured over the course of President Donald Trump’s entire second term, they are flat.

Bessent said on CNBC that he believes U.S. productivity growth is poised to neutralize concerns about rising inflation, and he dismissed high global prices as merely a temporary supply shock, rather than a long term shift.

“We will get on the other side of the Iran conflict,” he said.

Yet, if inflation remains the prevailing backdrop driver of market moves, stocks will eventually get hit, assuming the Federal Reserve takes action. By raising the cost to banks to borrow money, the central bank can slow the rate of inflation by effectively slowing economic growth.

Tuesday’s moves lower in the stock markets likely reflect the expectation of such a Fed move, experts say.

“Another global rise in interest rates and do stocks now finally care?,” wrote Peter Boockvar, chief investment officer of One Point BFG Wealth Partners. “I think it’s for sure gaining more attention.”