Interest Rates Are Crushing Stocks and Bonds Worldwide: Nikkei Drops 2.2%, UK Costs Hit 2008 High
Global markets are reeling as central banks signal they will keep interest rates high for longer, sending stocks tumbling and government borrowing costs soaring to levels not seen in decades.
Japanese stocks led the decline Monday, with the Nikkei index dropping 2.2% after Federal Reserve Chair Kevin Warsh raised the likelihood of further U.S. rate increases [1]. Semiconductor shares were hit hardest, as higher borrowing costs make tech stocks less attractive [1]. The selloff extended to U.S. markets, where stocks closed lower after Warsh signaled the central bank may keep borrowing costs higher than expected [2][3].
The pressure is also hitting bond markets globally. UK 10-year government bond yields surged to their highest level since 2008, while Japanese long-term yields climbed to peaks not seen since the 1990s [4]. Treasury yields rose as investors bet on a longer period of tight monetary policy [3][5]. The moves reflect growing fears that inflation will remain stubbornly high, forcing central banks to keep rates elevated [4].
Higher energy prices are adding to the problem. Oil climbed further Tuesday after fresh violence in the Iran war, with Brent crude rising 0.8% to $91.23 per barrel [6]. The conflict has cut traffic through the Strait of Hormuz, a passage that once handled about 20% of the world's oil shipments [6]. Higher energy costs typically push up consumer prices, strengthening the case for the Fed to act sooner [5].
The Philippine peso has fallen to an all-time low, dragged down by surging energy prices linked to the U.S.-Iran conflict [7]. The currency's slide mirrors struggles across the region as the war disrupts global markets [7]. Higher oil costs directly pressure the Philippines, which relies heavily on imported fuel [7].
Japan's market is facing its own reckoning. As the country's central bank pushes interest rates higher, the cost of capital is climbing, making Japanese equities less attractive to investors who once flocked to them for cheap borrowing [8]. For years, near-zero rates fueled a stock buying spree, but now higher interest rates mean higher discount rates, lowering the present value of a company's future cash flows [8].
The yield on the two-year Treasury, which closely tracks expectations about Fed moves, held steady at 4.34%, up significantly from about 3.50% at the start of 2026 [6]. The yield on the 10-year Treasury rose to 4.75% [6]. Higher interest rates can cool inflation but also risk hurting the jobs market [6]. Later this week, the U.S. will report August jobs data; in July, employers cut 23,000 jobs [6].