Global gross government debt is already near 94% of GDP, and markets have just pushed long-term borrowing costs noticeably higher. US 30-year Treasury yields hit 5.18% on May 18, while G7 10-year yields have moved toward 4%, up from about 3.2% before the conflict, Bloomberg Law and India Today reported. The repricing follows investor fears the Iran conflict will lift energy costs and keep inflation higher for longer. The IMF, in its April 15 Fiscal Monitor, warned debt could reach 100% of GDP by 2029 if the energy and food price shock persists, squeezing public finances and pushing up household and business borrowing costs.

The read here is simple. A market once treated as the world’s primary safe haven has been forced to reprice for higher inflation and bigger risk premia. That move matters because sovereign bonds set the pricing benchmark for mortgages, corporate debt and government funding costs worldwide.

How markets moved

Market data show the shift is broad and fast. The US long end rallied into higher yields, with the 30-year Treasury closing at 5.18% on May 18 while 10-year yields climbed into the mid 4% area in mid May, reflecting both higher inflation expectations and a steeper term premium, Bloomberg Law and India Today reported. In the UK, 30-year gilt yields reached 5.85% on May 15 before easing to about 5.72% shortly afterwards. Japan’s 30-year government bond rose to 4.15% in mid May after large moves across global markets, and Germany’s 30-year Bund traded near 3.68% in mid May. China has been a notable outlier, with its 30-year yield slipping to about 2.24% amid domestic demand factors, while India’s 30-year G Sec stayed elevated at roughly 7.7%.

Those prints came as investors reassessed the chance that the Iran war will lift energy prices and feed through to stubborn inflation. Morgan Stanley Research now expects Brent crude to average between $80 and $90 per barrel in 2026 even if tensions ease, a forecast that pushes inflation expectations higher and complicates central bank decisions on policy rates.

Investor behaviour amplified these shifts. RSM’s chief economist Joseph Brusuelas observed a sudden drop in demand at recent US Treasury auctions for two, five and seven year notes, which pushed yields higher and boosted measures of bond market volatility such as the MOVE index. Reduced auction demand and wider risk premia mean governments must issue new debt at noticeably higher rates than a few months ago.

Mastheads

Policy trade offs and the cost to households

The policy question is now unavoidable. The IMF said in its April 15 Fiscal Monitor that global gross government debt rose to almost 94% of GDP last year and warned it could hit 100% by 2029 if the energy and food price shock from the conflict persists. That puts governments in a squeeze: they may need to offer temporary, targeted support to shield vulnerable households, but any extra fiscal spending could lock in higher debt and interest costs for years.

Bloomberg Law highlighted one immediate transmission channel: consumers. It noted Americans are already paying more at the pump, with an estimated extra $20 billion spent on fuel as prices rose after the conflict began. Higher fuel bills translate into faster headline inflation and stronger pressure on central banks to keep policy tighter for longer.

The repricing isn't uniform. Markets still treat some sovereign curves, notably China’s long end, differently because of domestic demand and policy settings. But for the United States, the United Kingdom, Japan and much of Europe the message is clear: long-term borrowing costs are materially higher than they were before the conflict, and that will show up in public balance sheets and private-sector borrowing costs alike.

Morgan Stanley framed three scenarios depending on the conflict’s duration and the outlook for shipments through the Strait of Hormuz, and warned that even a near term reopening of routes wouldn't immediately restore lost output. Bloomberg Law characterised the episode as a second inflation shock in the 2020s, one that's prompting a broad reassessment of sovereign risk premia across a market global investors still treat as the main safe haven.

For markets, the mechanics are straightforward. Higher expected energy costs lift inflation expectations. That raises the term premium investors demand to hold long dated bonds. At the same time, weaker auction demand and a flight to quality elsewhere have pushed up yields in sovereign markets that aren't shielded by domestic policy action or capital controls.

All of this leaves a clear set of near term watching points: whether oil shipments through key chokepoints resume, how persistent the food and energy price shock proves, and whether central banks explicitly change their policy guidance in response to the higher inflation path that markets are now pricing.

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The IMF’s April 15 Fiscal Monitor gives the hard number to focus on: global gross government debt already near 94% of GDP and a plausible path to 100% by 2029 if the energy and food price shock endures. That's the fiscal arithmetic sovereigns must plan around as markets price a permanently higher cost of funding. Watch the IMF's next Fiscal Monitor, major central bank meetings and oil market reports for whether higher long-term funding costs are likely to stick.

This article was created with AI assistance.