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Long-term interest rates seen easing after Middle East-driven surge
Oxford Economics says the recent spike in long-term interest rates may reverse as oil volatility cools, though fiscal risks and term premiums could keep yields elevated globally
- PUBLISHED: Thu 28 May 2026, 8:08 PM
Long-term interest rates, which have climbed sharply amid the Middle East conflict, are likely to ease later this year as markets reassess the persistence of the shock, according to research from Oxford Economics.
The surge in global bond yields reflects a cyclical overshoot rather than the start of a new regime of permanently higher rates. Financial markets appear to be treating the geopolitical shock as more enduring than it is, even though the impact should fade as oil price volatility stabilises and growth weakens.
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Long-term borrowing costs have risen since the onset of the conflict, with the pace of increase accelerating in recent weeks and pushing yields above prior forecasts in several economies. However, similar episodes in the past — including oil supply disruptions — have often led to temporary spikes followed by corrections once conditions stabilised.
Oil market volatility is likely to remain as a key driver behind the recent rise in yields. Higher and more uncertain energy prices have increased the inflation risk embedded in long-term rates, pushing up the term premium — the extra compensation investors demand for holding longer-dated debt.
“From a global perspective, odds are financial markets are making a similar mistake to the one they made in 2022 by misinterpreting a supply shock as a regime shift, and factors other than Russia’s invasion of Ukraine proved more persistent in keeping rates higher for longer, including tight labor markets and structural debt,” wrote Ryan Sweet, Chief Global Economist at Oxford Economics and author of the report.
As volatility in oil markets subsides, this pressure is expected to reverse. Oxford Economics forecasts the US 10-year Treasury yield will average about 4.3% in the fourth quarter, roughly 30 basis points lower than current levels. Japan’s equivalent yield is seen easing only slightly, while UK long-term rates are likely to remain elevated due to fiscal pressures and political risks.
The recent jump in yields has also been influenced by markets pricing in a more aggressive policy response from central banks than is likely. Policymakers are expected to respond cautiously to a supply-driven shock, especially as the economic impact of higher energy prices feeds through with a lag and dampens growth.
Still, the outlook is not without risks. If oil volatility declines but term premiums remain elevated, or if inflation expectations rise even as energy prices fall, it could signal more persistent second-round inflation effects or worsening fiscal dynamics.
For now, economists maintain that the current episode reflects market mispricing rather than a structural shift, with long-term rates likely to moderate as underlying economic conditions reassert themselves.
Associate Editor Somshankar Bandyopadhyay brings more than three decades of experience to the KT newsroom. Currently, he manages the news production of the business section, ensuring that the top economic and business news of the day reaches its readers.