Global Sell-Off in Government Bonds Amid Inflation Concerns from Trump’s Tariffs and Europe’s Defense Spending

Global Sell-Off in Government Bonds Amid Inflation Concerns from Trump’s Tariffs and Europe’s Defense Spending

Global bond markets are facing a massive sell-off due to rising inflation fears, particularly in the U.S., Japan, and Europe. Germany, in particular, is under pressure from its new government's decision to boost defense spending.

Surging Bond Yields Across Europe
Germany’s 10-year bond yield has reached its highest level in 35 years after the new coalition government approved increased defense spending. Analysts from Rabobank attribute the bond sell-off to expectations of fiscal stimulus, driving risk appetite and higher inflation forecasts.
Bond yields across Europe also rose ahead of the European Central Bank’s (ECB) expected 0.25% interest rate cut. Italy and France saw their 10-year bond yields surge, while the UK’s 10-year bond yield hit a decades-high level before stabilizing at the market close.

Bond Sell-Off Spreads to U.S. and Japan
The U.S. 10-year Treasury yield increased by 0.04% to 4.3148%, while Japan’s bond market also faced selling pressure. Japan’s 10-year government bond yield rose by 0.08%, reaching a 16-year high.
Naeem Aslam of Zaye Capital Markets warned that Japan’s bond yield surge, despite yield curve controls, could be an early warning sign of broader financial market stress.

Two Key Drivers Behind the Sell-Off
Mark Oswald of ADM Investor Services pointed to two main factors driving the global bond sell-off:
- Inflation Fears from Trump’s Tariff Policies
Investors worry that a potential trade war under Trump could drive inflation higher.
- Europe’s Increased Defense Spending
Germany’s incoming Chancellor, Friedrich Merz, has pushed for an €800 billion defense expansion under the "Whatever It Takes 2.0" policy. This is expected to significantly increase government borrowing at a time when most EU nations (except Germany) are already burdened with record-high debt levels.

Ralph Preusser from Bank of America Global Research highlighted three major uncertainties affecting global markets: trade tariffs, geopolitical risks, and U.S. fiscal policy. These factors could delay Federal Reserve interest rate cuts while pushing Europe towards more aggressive fiscal expansion.
With global bond markets under intense pressure, investors are closely watching economic policies from major economies to navigate the ongoing volatility.