Global bond markets tumbled Monday as a surge in oil prices forced investors to rethink the outlook for interest rates — and raised fresh fears of inflation just as economic growth shows signs of slowing, Bloomberg reports.

Benchmark 10-year U.S.Treasury yields climbed to about 4.17%, while yields on the policy-sensitive two-year note jumped four basis points, signaling investors are pushing back expectations for Federal Reserve rate cuts.

Before the U.S. launched military strikes on Iran on Feb. 28, traders widely expected the Fed to begin cutting rates by July. Now markets are betting the first move may not come until September — or possibly not at all this year.

The turmoil in bond markets is being driven by a massive energy shock. Global oil prices have surged toward $120 a barrel, nearly 80% higher since the Iran war disrupted shipments through the Middle East.

The spike is rattling investors because sustained energy price increases could force central banks to keep borrowing costs elevated to fight inflation — even as the global economy slows.

Strategists at Oversea-Chinese Banking Corp warned the oil shock is already rippling through global markets.

“A weeklong halt in Hormuz shipping is driving a fast-escalating energy shock, lifting oil and gas prices, boosting the U.S. dollar and global yields, and challenging 2026 consensus trades as stagflation risks rise,” the bank said in a note.

The selloff has been even more severe in Europe and the UK. Markets now see a 60% chance the European Central Bank could raise rates twice this year, while traders are assigning nearly a 50% probability that the Bank of England hikes borrowing costs once before year-end.

German two-year bond yields surged to 2.40%, while UK equivalents spiked as much as 30 basis points to 4.17% — the biggest jump since October 2022.

Economists warn the economic consequences could be significant if high energy prices persist. According to the International Monetary Fund, a 10% increase in energy costs lasting a year could raise global inflation by about 0.4 percentage points and cut economic growth by up to 0.2 points.

Meanwhile, analysts at Bloomberg Intelligence estimate that oil demand tends to weaken when prices hit around $133 a barrel, highlighting the risk of economic damage if crude continues to climb.

Investors are increasingly bracing for a prolonged conflict in the Middle East that could keep energy markets under strain. Iran’s decision to elevate the son of the late Ayatollah Ali Khamenei as the country’s next supreme leader suggests Tehran is unlikely to soften its stance as the war intensifies.

At the same time, supply pressures are mounting after production cuts in Kuwait and the United Arab Emirates, adding to fears that global oil markets could remain tight.

Oil’s outsized role in the global economy means the ripple effects could be widespread.

“Oil is arguably the single most important input into global inflation,” said Tim Murray, a capital-markets strategist at T. Rowe Price.

With many Asian economies heavily dependent on imported energy, Murray said the surge in crude prices could become “a relative headwind for the region in a risk-off environment.”

Bond markets across Asia have already begun to feel the impact. Yields surged sharply in Australia, New Zealand and South Korea, while Japanese government bond yields jumped more than 11 basis points.

Even Chinese government bonds — which initially held up better after the Iran conflict erupted — have begun to slide as investors worry rising oil prices could fuel imported inflation.