Surging bond yields threaten stock rally as investors reprice inflation and war risk
Surging global bond yields are threatening the stock market rally as investors rapidly reprice inflation risks, geopolitical instability and mounting sovereign debt burdens.
This is the warning from Nigel Green, CEO of global financial advisory deVere Group, as a sharp selloff in global bonds accelerates amid escalating Middle East tensions and renewed concerns that interest rates could remain elevated for longer than markets had expected.
US Treasury yields climbed sharply on Monday, with the benchmark 10-year yield rising to 4.631%, its highest level since February 2025. The two-year Treasury yield, highly sensitive to interest rate expectations, hit a 14-month high of 4.102%, while the 30-year Treasury yield rose to 5.159%, a one-year high.
Japanese bond markets also came under renewed pressure. The 30-year Japanese government bond yield climbed above 4.2% for the first time on record, while the 10-year Japanese yield rose to levels last seen in 1996 after reports emerged that Tokyo is preparing fresh debt issuance to fund emergency war-related spending measures.
Nigel Green says investors are beginning to recognise that bond markets are fundamentally reshaping the outlook for global equities.
“Bond markets are beginning to challenge the entire foundation of the equity rally,” he says.
“For years, equities benefited from ultra-cheap money, suppressed sovereign yields and abundant liquidity. Investors had little alternative but to move further out on the risk curve.
“Now investors can secure attractive returns from government debt again at precisely the moment inflation pressures are intensifying globally.”
The latest move in yields came as oil prices climbed sharply following renewed attacks linked to the Middle East conflict. Brent crude traded around $111 a barrel after diplomatic efforts to end the Iran war appeared to stall following reports of a drone strike targeting a nuclear facility in the United Arab Emirates.
Nigel Green says geopolitical risks are feeding directly into inflation expectations and the global rates outlook.
“Markets increasingly recognise that inflation risks remain structurally elevated,” he says.
“Energy shocks, tariffs, defence spending, labour shortages and massive AI and tech infrastructure investment are all contributing to persistent inflationary pressure across major economies.”
Global investors are now reassessing expectations for central bank policy over the coming quarters.
“Bond markets are warning that inflation could prove much stickier than many investors anticipated,” says Nigel Green.
“Even if immediate rate hikes are not the base case, investors are demanding significantly higher compensation for inflation risk, fiscal deterioration and geopolitical uncertainty.”
The scale of sovereign borrowing is adding further pressure to global fixed income markets.
Japan’s plans for additional fiscal spending have intensified concerns about already strained public finances, while the US, UK and several European economies continue issuing enormous volumes of debt into markets already demanding higher yields.
“Governments across the world are borrowing aggressively at the same time investors are becoming less willing to finance deficits cheaply,” Nigel Green explains.
“Higher sovereign yields feed directly into broader financial conditions. Mortgage costs remain elevated, corporate refinancing becomes more expensive and equity valuations face much greater scrutiny.”
He notes that the stock market rally has become increasingly concentrated in a relatively small group of AI and tech companies, leaving broader markets more exposed if yields continue climbing.
“AI optimism and strong earnings have supported equities, but markets are becoming far more sensitive to the cost of capital,” says Nigel Green.
“Higher bond yields mechanically compress equity valuations by raising discount rates and offering investors a more competitive alternative to stocks.”
Nigel Green concludes: “This is becoming one of the defining investment stories of 2026.
“Global markets are undergoing a significant repricing driven by inflation fears, geopolitical conflict, rising debt issuance and structurally higher yields.
“Fixed income is becoming genuinely competitive with equities again, and investors are adjusting accordingly.”