(Reuters) - Bonds across the globe sank on Monday as a rapidly worsening U.S.-Israeli war with Iran pushed oil prices well above $115 per barrel, heightening investor fears over inflation and how central banks will react.

Oil prices soared ‌as much as 28% to almost $120 per barrel - their highest since July 2022 - as the week-long war led some major oil producers in ‌the region to cut supplies and concerns of prolonged disruption to shipping through the Strait of Hormuz continued to rattle investors. Brent crude was last up at 16% at around $107.

And Iran on ​Monday named Mojtaba Khamenei to succeed his father Ali Khamenei as supreme leader, signaling that hardliners remain firmly in charge.

"Today is much more like in panic mode," said Lyn Graham-Taylor, senior rates strategist at Rabobank in London.

Investors are "purely pricing in a focus from central banks on the inflation side of an energy supply shock. There's relatively limited pricing in of the downside from the perspective of GDP," he said.

The spectre of rising inflation and the possibility of central banks needing to keep rates ‌higher for longer or even hiking borrowing costs has ⁠meant the safe-haven allure of bonds is being overlooked in the conflict.

BOND SELLOFF INTENSIFIES

On Monday, government bond yields surged further as prices tumbled, adding to last week's dramatic moves.

Investors moved to price in two rate hikes from the European Central Bank ⁠by year-end, a huge turnaround from February, when the risk was another rate cut.

They also price in a chance that the Bank of England will hike rates this year, having seen a March cut as fairly likely before the conflict. Expectations of Fed rate cuts have been pushed back.

Britain bore the brunt of the selling pressure, with two-year ​yields ​rising nearly 40 basis points, setting them up for their biggest daily jump since former ​Prime Minister Liz Truss's failed 2022 economic plan.

In Germany, yields ‌rose 11 bps, touching the highest since July 2024.

Those moves followed jumps of around 30 bps each last week, as European markets proved particularly vulnerable to the sell-off given the region's dependency on energy imports.

In contrast, longer-dated bond yields jumped in Japan, another energy importer, while the yen also felt the pressure from the surge in oil prices. [JP/]

The moves were more contained in the U.S., the world's largest liquid natural gas producer, where two-year yields were last up 7 bps.