30-Year Treasury Yield Hits 5.2%, Highest Since 2007, as Iran War Stokes Inflation

Tuesday, the 10-year benchmark yield rose to 4.687%, the highest level since January 2025. The 30-year benchmark yield hit 5.197%, the highest level since July 2007. The yield on the 2-year note went up to 4.12%. Since the U.S. and Israel's war on Iran began 80 days ago, bond prices have been slowly going down because prices move against yields. Just below 4% was the yield on the 10-year note before the war. It has never really gotten better.

The S&P 500 dropped 0.67% to 7,353.61, marking the third day in a row that it has lost value. The Dow lost 322 points and the Nasdaq lost 0.84%.

What Is Driving the Sell-Off

The main cause is the war in Iran, but it is spreading through more than one route at the same time.

This is the most direct shock. The Strait of Hormuz is still closed, which means that oil and gas prices are at their highest levels in four years. This is the biggest supply disruption in the history of the modern energy market. According to the Bureau of Labor Statistics, this caused U.S. consumer prices to rise at the fastest rate in three years in April. Food prices, airfare, and factory inputs are all going up because of rising energy costs. This makes inflation more widespread and harder to control.

"Bond markets are warning that inflation could prove much stickier than many investors anticipated," said Nigel Green, CEO at deVere Group.

The story about the economy getting worse makes the energy shock worse. Global government debts are getting bigger because NATO members are spending more on defense because of the conflict in the Middle East. This is making things even worse for countries' finances, which were already tight before the war. In a world where inflation is still high, investors want higher yields on long-term government debt that is being released in larger amounts.

"The things that are causing the sell-off—deteriorating finances, rising prices, ineffective central banks, and rising defense spending—will not go away in the next week." "They are getting worse," reported Ajay Rajadhyaksha, who is the global head of research at Barclays.

The Rate Hike Bet That Has Changed Everything

The most important change is in what the Federal Reserve thinks will happen. At the start of 2026, most people thought rates would go down. That assumption has been completely turned around. Two-year yields, which show how people think the Federal Reserve will act, are at their highest level in over a year. This means that people now think the Fed will either keep rates the same or possibly raise them.

"When the year began, everyone thought rates would go down; that was part of the bull case. "It looks like rates will go up now," said Jim Lacamp, senior vice president at Morgan Stanley Wealth Management.

A poll of global fund managers by Bank of America released on Tuesday showed that 62% of those surveyed think the 30-year Treasury yield will reach 6%, a level not seen since late 1999. This would mean an extra 85 basis points of price growth from where it is now. Only 20% of those who answered want a 4% return in 30 years.

Ian Lyngen, who is in charge of U.S. rates at BMO, said that if 30-year yields hit 5.25% in the next few weeks, it would probably cause a "more durable pullback" in the prices of stocks. It's now less than 6 basis points away from that point.

The Global Dimension

The sell-off in U.S. bonds is not happening by itself. There is a 3.684% return on Germany's 30-year bund. The yield on Britain's 30-year gilt went up to 5.773%, which is the highest amount since 1998. This week, Japan's 30-year yield hit an all-time high. The coordinated selling of bonds around the world is due to inflationary pressures caused by the energy shock as well as budget worries in each country.

The head of fixed income research at Strategas Research Partners, Thomas Tzitzouris, said, "Inflation is probably the single biggest driver." "The second-biggest driver is that deficits are just skyrocketing globally — and the U.S. is probably still the cleanest dirty shirt."

The important technical level is 4.8% on the 10-year; this level has only been broken a few times since 2007. A sustained close above it would mean that rates are going to stay high for a long time, which would have big effects on how much stocks are worth, mortgage rates, and the cost of borrowing money for consumers.

The figure of 5.25% on the 30-year bond is what Lyngen calls the "near-term equity market risk trigger." Based on how things are going now, both numbers are now within a reasonable range.

The bond market will continue to be under selling pressure until the Strait of Hormuz reopens and there are real signs that oil inflation is going down. At the same time, the stock market will continue to be pulled down by rising risk-free rates.