Global government bonds are about to finish their worst quarter since 2024 as $100 oil revives the threat of an inflation shock to the world economy. A Bloomberg index of the debt has fallen 2.1% since June. It’s the biggest move since the three-month stretch at the end of 2024, when Donald Trump won a second term as US president and investors braced for a more expansionary fiscal policy. US Treasuries have been hit hard in the recent selloff, with the 30-year yield surpassing 5.61% on Tuesday to touch a level last seen in 2002. Shorter-maturity bonds have also been punished in the period, despite trimming some of their losses after the Federal Reserve’s favored inflation indicator came in lower than estimated on Wednesday. The ongoing conflict in the Middle East, as well as booming spending on artificial intelligence and a robust US economy, are all signaling to investors that inflation may be a more serious problem than they anticipated. In response, central banks in Australia, the European Union, Japan, Norway and the United States have raised interest rates over the past three months.

"The third quarter didn’t just drop hopes of ‘lower for longer,’ but doused them in scarce diesel and set fire to them," said Michael Every, global strategist at Rabobank, adding that the big issue now is how many more rates hikes are coming. Money markets have fully priced in three further rate hikes by the Federal Reserve and European Central Bank over the next year. In major debt markets, France has endured the most severe selloff. Investors are on edge ahead of next year’s presidential election, as opposition parties have been reluctant to compromise with President Emmanuel Macron’s outgoing administration just seven months ahead of the vote. French 10-year yields have increased by 1.15 percentage points to 4.8%, the worst quarterly performance since at least the establishment of the euro in 1999.

The bonds underperformed on Wednesday as the country’s latest inflation figures showed price growth accelerated to the fastest pace in more than two years in September, putting more pressure on ECB policymakers. One measure that’s being closely watched is the spread between French and German debt as an indicator of the level of stress within the market. The extra yield demanded by investors to hold French bonds over German 10-year debt now stands above 1.2 percentage points, a level last reached in 2012."Further spread widening in Europe is likely even without additional energy shocks," wrote RBC Capital Markets rates strategists led by Peter Schaffrik.