Global government bond yields pushed higher again on Friday, extending a selloff, as market pricing now indicates the Federal Reserve, European Central Bank, and Bank of England will deliver at least three more rate hikes over the next year.

Following this week's rate increases from both the US Federal Reserve and the Bank of Japan, investors are closely monitoring the potential for a fresh escalation in the global tightening cycle as inflation worries persist.

Major Rate Hikes Land as Central Banks Step Up Fight

Central banks are intensifying their efforts to combat inflation, with the Fed following the ECB's move by raising rates 25 basis points on Wednesday and signalling another hike later this year, reinforcing market confidence in its resolve to tame price pressures.

The underlying forces driving bond yields higher remain firmly in place, including the risk of sustained elevated oil prices, substantial government debt levels, and competition for capital from artificial intelligence-related enterprises.

Capital senior market analyst Daniela Hathorn noted that while the Fed has strengthened its anti-inflation credibility, the combination of heavy government bond issuance, rising term premiums, and intensifying private sector competition for capital means monetary policy alone may struggle to counter the upward pressure on long-end yields.

The Bank of Japan raised its policy rate to 1.25% on Friday, the highest level since 1995, though the split vote on the decision has cast doubt over the pace of future policy adjustments. Market pricing now suggests a strong likelihood of one more hike from the BoJ this year.

In Europe, the Bank of England held rates steady but hinted it could raise its benchmark rate if energy-driven inflation worsens due to Middle East conflict.

Tradeweb data showed the US 10-year Treasury yield climbing 5.4 basis points to 4.995% on Friday, after briefly breaking through the psychological 5% level earlier this week to reach 5.041%, the highest since 2007. Germany's 10-year yield added 2 basis points to 3.500%, moving back toward the 3.572% high set at the start of the week, its strongest level since 2009. The UK 10-year yield rose 5.7 basis points to 5.275%, following Monday's 5.493% peak, the highest since 2007.

Notably, France's 10-year yield jumped 13 basis points to 4.573%, pushing the spread over German Bunds beyond 100 basis points for the first time since July 2012. French Prime Minister Sebastien Lecornu is finalising the 2027 budget aimed at deficit reduction. Credit default swaps reflecting French sovereign default insurance costs touched their highest level since April 2025 at approximately 41.5 basis points, meaning the cost of hedging French sovereign debt now exceeds that of all other developed economies.

Another Round of Tightening on the Horizon

The US-Iran conflict has pushed oil prices higher, contributing to the current inflation concerns. With a key Saudi pipeline to the Red Sea attacked, European refiners may face disruptions to crude allocations next month. Reports indicate Saudi Aramco has informed at least two European refineries that crude supplies will be halted next month due to the conflict.

Yemen's Houthi rebels have occupied several areas in recent weeks, including an island in the Bab el-Mandeb strait, strengthening their ability to disrupt Saudi crude shipments through the Red Sea. Raymond James investment strategist Pavel Molchanov commented that the unclear status of Saudi Arabia's damaged East-West pipeline adds further uncertainty to Middle East crude exports.

Market pricing compiled by Yicai shows Australia and South Africa are expected to hike rates by 25 basis points this month, while Norway, New Zealand, and Canada are anticipated to take action within the year. Notably, investors predict the Fed, ECB, and BoE will collectively raise rates at least three times over the next year.

Institutions warn that bond yields still have room to climb given the possibility of further rate increases. Societe Generale rate strategists wrote in a research note that the global term premium repair process is not yet complete, and the market could still price in more aggressive central bank hiking paths.

Bank of America believes investors should begin preparing for the risk of the Fed raising its benchmark rate above 5%. The bank argues that rate markets still underestimate the ultimate level of the current hiking cycle that began this week, urging clients to position for further increases in US 2-year Treasury yields. BofA suggests overnight borrowing costs could revisit the highs of the 2022-2023 tightening cycle, when the federal funds target rate peaked at 5.5%. The bank forecasts the 2-year Treasury yield will rise to 5% this year from its current level of around 4.7%, noting that Fed Chair Kevin Warsh's comment about Wednesday's hike removing "some degree of accommodation" indicates officials do not yet view monetary policy as restrictive for the US economy.

Mizuho wrote in a research note that upside inflation risks remain dominant, with central banks focused on rate levels and loose financial conditions. The bigger uncertainty lies in whether central banks can deliver on the terminal rates currently priced by the market. For rates watchers, the good news is that the central bank quiet period is coming to an end, with around 18 officials from the Fed, ECB, and BoE scheduled to speak at various events next week.