The global bond market faces a "slow bear" in 2026: Milder than 2022, but pain may be more persistent

According to Zhihui Finance APP, a bond sell-off storm sweeping across developed economies worldwide is accelerating. On September 1, government bonds from the United States, Japan, the United Kingdom, Germany, and Australia were simultaneously sold off, with long-term yields soaring to their highest levels in years or even decades. The yield on the Bloomberg Global Government Bond Index has risen for four consecutive trading days, standing at 3.72%, the highest since mid-2008. However, despite the seemingly dramatic sell-off, it is still not comparable to the bond "bloodbath" triggered by surging inflation four years ago.

Numerical Comparison: The "Growing Pains" of 2026 vs. the "Crash" of 2022

This year, the storm has swept through almost every corner of the developed economic sphere—Japan's 10-year government bond yield touched 3% for the first time since 1996; the US 10-year treasury yield broke through 4.8%, approaching its highest level since October 2023; the UK 30-year government bond yield reached a new high since 1998; yields on German and French treasuries climbed to their highest levels in more than a decade.

Nevertheless, this seemingly brutal sell-off is still not on the same scale as the bond market crash triggered by inflation four years ago. Data shows that global government bond yields have risen by about 17 basis points over the past 20 trading days, compared to 62 basis points during the same period in 2022. From peak to trough, bond prices have fallen by a total of 4.2% so far in 2026, far lower than the 23% plunge in 2022.

The key difference lies in the starting point. At the beginning of 2022, global bond yields were at historical lows, making prices highly sensitive to rate changes. Current yields have bounced from much higher levels, with coupon income providing a greater buffer against price declines—bonds within the Bloomberg Global Government Bond Total Return Index have offered an average coupon of 2.68% this year, higher than 1.84% in 2022. Higher coupon income has partially offset capital losses.

Although there is virtually no sign of the current sell-off abating, the relatively mild yield fluctuations so far have offered some comfort to veteran market observers. Meanwhile, volatility in the Bloomberg Global Government Bond Yield Index has fallen from a peak of 56 basis points in May to 37 basis points, substantially lower than the circa 92 basis points peak in 2022. This "muted volatility" may well be the market’s norm as it digests multiple structural pressures.

"Perhaps this could be deemed a bit of a reassurance," said Stephen Miller, advisor at Sydney-based investment management firm GSFM. While he does not view bonds as a "strong buy" yet, he noted that at current yield levels, "bonds are worth considering for yield-oriented investors."

Kerry Craig, global market strategist at J.P. Morgan Asset Management in Melbourne, also pointed out: "The reality is not as dire as what the bond market is reflecting."

Triple Pressure: Inflation, Supply, and the End of the "Era of Cheap Money"

Although the scale of this sell-off is less than in 2022, its driving factors are more complex and multi-layered, often overlapping with one another.

Soaring Oil Prices and Rekindled Inflation

Ongoing US-Iran tensions have driven international oil prices back above $90 per barrel. Brent crude broke above $91 per barrel on Tuesday, while European benchmark natural gas prices also reached a three-and-a-half-year high. The market is concerned about persistent disruptions to energy transport through the Strait of Hormuz, making the upward pressure on energy prices unlikely to abate quickly. Rising oil prices have directly reinforced inflation expectations, fueling fears that interest rates will have to remain high for an extended period.

Fed Chairman Kevin Walsh's hawkish speech at last Friday’s Jackson Hole Global Central Banking Symposium was the direct catalyst for this round of sell-offs. The probability of a Fed rate hike in September as priced in by interest rate swaps surged from 34% before Walsh’s remarks to 68% afterwards.

Flood of Supply: Double Squeeze from Government Debt and AI Bond Issuance

Deeper pressure comes from a glut in bond market supply. US federal government debt exceeded $40 trillion for the first time in August, with this fiscal year’s interest expenses projected to approach $1.2 trillion. Simultaneously, the artificial intelligence boom has generated another massive financing demand—tech giants such as Alphabet, Amazon, Meta, Microsoft, and Oracle have together issued about $220 billion in bonds this year to fund data centers and AI infrastructure. When both governments and tech behemoths compete for funds in the bond market, the supply pressure is significantly amplified.

Japan: The Collapse of the Global "Cheap Money" Era’s Final Pillar

Soaring Japanese government bond yields carry far-reaching systemic significance. For years, low yields on US Treasuries relied in part on steady inflows of cheap foreign capital from low-rate economies like Japan. The yield on the 10-year Japanese government bond was just around 1.5% a year ago, but has now doubled to 3%. The 3% rate is the Japanese government’s assumption for bond interest costs in drafting the FY2026 budget—yet market rates have already exceeded this assumption. The proportion of international investors in Japanese government bond monthly spot trading has climbed from 12% in 2009 to about two-thirds, meaning that funds previously flowing to US Treasuries are now rotating back to Japan. Bloomberg strategists note that G10 fixed income traders are watching Japanese government bonds more closely, and Australian bonds are increasingly priced in tandem with Japanese rather than US benchmarks.

Bank of Japan Governor Kazuo Ueda has hinted at a possible rate hike in September, with markets increasingly expecting a nearby hike. Japan, as the world’s largest foreign holder of US Treasuries, could trigger global capital repatriation as its domestic yields rise, putting additional pressure on the US bond market. Meanwhile, the market has already fully priced in a European Central Bank rate hike next week, and the probability of a Bank of Japan hike in September stands at 92%.

TD Securities’ Asia-Pacific Senior Rates Strategist commented: "The stickier inflation is, the longer policy rates must stay higher. Fiscal deterioration and higher term premium will continue to be market focal points."

The Next Key Threshold for Markets: The 5% "Psychological Line"

So far, no one is claiming that yields have peaked. Analysts point out that factors such as rising energy prices and inflation pressure, the shift from saving to investment preferences, bond market volatility triggered by Trump-style adventurism, a greater fiscal risk premium, and the crowding-out effect from heavy corporate bond issuance, make it difficult to argue the upward movement in yields will stall in the short term.

Ronald Albahary, Chief Investment Officer at US wealth management firm LNW, warns that if the 10-year US Treasury yield breaches 5%, it will be "the straw that breaks the camel’s back," potentially triggering a sell-off in risk assets. Nancy Vanden Houten, chief economist at Oxford Economics, pointed out: "Given the upside risks to inflation, geopolitical uncertainty, record corporate borrowing, and massive government bond issuance, long-term rates remain susceptible to upward pressure." Rising Japanese bond yields are another potential source of stress, as this may induce sweeping global capital flows back to Japan.

The ramifications of this bond sell-off extend far beyond the bond market itself. Government bond yields are a crucial benchmark for financing costs throughout the economy—from home mortgages, auto loans, and student loans to corporate financing, the overall rise in borrowing costs will ripple into every corner of the real economy. Under the combined pressures of ongoing conflict with Iran, sticky inflation, and unchecked fiscal deficits, the global bond market’s repricing may have only just begun.

Compared with the "fast bear" market triggered by aggressive central bank rate hikes in 2022, this round of pain is more muted, more lasting, and more elusive in terms of a clear end point. Ayako Sera, senior market strategist at Sumitomo Mitsui Trust Bank, pointed out: "The negative factors for bonds have been steadily accumulating, but so far, there has not been a decisive catalyst to force investors to exit the market."