Global bond sell-off deepens as $100 oil stokes stagflation fears

Global borrowing costs came under further pressure on Friday as soaring energy costs clouded the economic outlook for many countries.

The yield on German 10-year government bonds, seen as the euro area benchmark and a traditional safe haven, crossed 3.5% for the first time since April 2011, according to LSEG data.

The U.S. 10-year note yield, crucial for credit cards and mortgage rates, nudged slightly higher after surpassing 4.9% for the first time in three years on Thursday.

Japan's 10-year yield jumped 6 basis points on Friday, though it remained just shy of the 1996 high it reached last week. Yields were broadly higher across Asia Pacific, with Australia's 10-year up 12 basis points and South Korea up 8 basis points.

Oil prices eased on Friday, but remained around the $100-a-barrel threshold, with international benchmark Brent Crude futures at $105.4 a barrel, while European natural gas futures hit their highest level since 2022.

Investors are nervous about the mounting debt loads and spending plans of rich countries around the world, and analysts at Deutsche Bank said "fears about stagflation" — low economic growth and high inflation — were rippling through multiple asset classes.

Deutsche flagged a host of concerns, including continued shipping obstructions on the Strait of Hormuz and Red Sea, lower Saudi Arabian oil output, and hawkish commentary from the European Central Bank when it raised interest rates on Thursday.

"Comments from Donald Trump suggest the chances of any diplomatic progress [with Iran] before the midterm elections in the U.S. are looking slim, leaving markets to confront the prospect of oil prices remaining elevated for at least a couple of months," AJ Bell investment director Russ Mould said in a Thursday note.

Kim Fustier, senior global oil and gas analyst at HSBC, said this week that the market was adjusting to a "new normal" in which the Strait of Hormuz was "neither fully closed nor fully open, but persistently impaired."

"If diplomacy fails and Hormuz flows stay near current levels, inventories could draw toward operational lows," and Brent crude could rise to around $120 a barrel, Fustier said.

She added that, under such a scenario, Brent crude prices would likely only ease in response to weaker demand and greater non-OPEC supplies in the third quarter of 2027.

France on Thursday cut its annual growth forecast to 0.4% in 2026 from 0.7% previously, citing the impact of inflation, the summer's heat waves and a construction downturn.

The head of Germany's central bank told CNBC on Friday that persistently higher energy prices could spur the European Central Bank to move interest rates into mildly restrictive territory to combat inflation.

U.K. borrowing costs were a rare bright spot on Friday, falling on the short and long end after economic growth for July came in at a better-than-expected 0.4%.