Global Bond Market Instability Deepens Amid Middle East Conflict and Rising Deficits

Global financial markets are facing intense instability this week as a persistent sell-off in government bonds rattles international exchanges. Yields on major sovereign debt instruments, including UK gilts have surged to multi-year highs, reflecting deep investor anxiety over mounting national deficits and systemic inflation. Total US government debt recently surpassed the $40 trillion threshold, compounding macroeconomic pressures worldwide.

The market friction has been heavily exacerbated by renewed military clashes involving the US and Iran, which have pushed Brent crude oil benchmarks to hover around $95 a barrel. Energy price spikes threaten to derail central bank efforts to tame inflation, with analysts increasingly pricing in aggressive interest rate hikes heading into the final quarter of 2026.

Asian equity indices took heavy losses earlier in the week, with Tokyo’s Nikkei 225 tumbling 2.85%, China’s CSI 300 dropping 1.4%, and South Korea’s Kospi falling 3.3%. Economists warn that persistent sovereign debt expansion combined with commodity shocks will severely limit fiscal headroom for governments globally, forcing a potential tightening of public spending and corporate credit conditions.