Global bond rout deepens as inflation fears trigger rate-hike bets

* U.S. Treasury yields rise to one-year peaks; JGB yields scale record highs

* Renewed tensions in Middle East keep investors worried about inflation, growth risks

* Japan likely to issue fresh debt to deal with blow from Iran war

* Investors ramp up bets of global rate hikes (Updates prices)

By Rae Wee

SINGAPORE, May 18 (Reuters) - Bonds from Tokyo to New York extended losses on Monday as rising energy prices from the ongoing Middle East war fanned inflation fears and stoked investor wagers on rate hikes from global central banks.

Benchmark 10-year U.S. Treasury yields, which move inversely to prices, jumped to their highest since February 2025 at 4.631%, having climbed more than 20 basis points last week.

The two-year yield, which is most sensitive to inflation and rates expectations, touched a 14-month top of 4.102%, while the 30-year U.S. Treasury yield rose to a one-year high of 5.159%.

The rising yields lifted the U.S. dollar and cast a shadow over stock markets that have surged on the AI enthusiasm of recent weeks.

The bond selloff came on the back of a climb in oil prices on Monday, with Brent crude futures at $111 a barrel, as efforts to end the Iran war appeared to have stalled following a drone strike at a nuclear power plant in the United Arab Emirates.

More than two months into the Middle East war, investors are beginning to fret about the economic fallout from the conflict as inflationary pressures mount and what that would mean for the global interest rate outlook.

"The 'higher for longer' story is coming back, even if actual rate hikes are still not the base case," said Charu Chanana, Saxo's chief investment strategist.

JAPAN BOND YIELDS AT RECORD HIGH

Adding to the selloff on Monday was news that Japan's government will likely issue fresh debt as part of funding for a planned extra budget to cushion the economic blow from the war, worsening already strained government finances.

Yields on the 30-year Japanese government bond (JGB) jumped more than 10 bps to their highest on record at 4.200% while the 10-year yield touched its highest since October 1996 at 2.800%.

DBS senior rates strategist Eugene Leow said news of the extra budget would compound current bond market anxieties.

"Sentiment was already weak heading into last week's close. Additional fiscal spending from Japan definitely worsened matters," Leow said.

"This feels like a rolling re-pricing across curves in the region as investors grapple with inflation worries."

Markets are now pricing in a more than 50% chance the Federal Reserve would raise rates by December, according to the CME FedWatch tool, to combat the rise in inflation.

The European Central Bank is seen hiking as early as next month and the Bank of England about twice this year .

Over in Europe, Germany's bund futures and French OAT futures fell about 0.4% and 0.45%, respectively.

INFLATIONARY PRESSURES COMING THROUGH

Monday's rout followed a steep selloff from last week, as investors were spooked by a recent raft of hotter-than-expected inflation figures globally, particularly in the United States.

"The fact that we are now seeing data backing up inflationary fears that have been in the market since the Middle East conflict started I think is key," said Nick Twidale, chief markets analyst at ATFX Global.

Data last week showed U.S. consumer and producer prices surged in April, with similar readings seen in China, Germany and Japan.

Much emphasis had also been placed on a closely watched two-day summit between U.S. President Donald Trump and Chinese President Xi Jinping last week, where investor hopes for a breakthrough in the Middle East war fell flat.

"As the Trump-Xi meeting... did little to raise hopes for a coordinated U.S.-China effort to pressure Iran into reopening the Strait of Hormuz, the combination of a persistent oil supply shock, increasing inflation rates and still-resilient demand became a recipe for higher interest rates," said analysts at Barclays.

Though the bond rout was global, many of the drivers were at least partly local in nature.

UK gilt yields surged last week, hitting their highest in decades, as pressure mounts on Prime Minister Keir Starmer to resign over his Labour Party's hefty losses in local elections, and as challengers emerge. (Reporting by Rae Wee; additional reporting by Ankur Banerjee; Editing by Sam Holmes)