The global bond markets are experiencing increased volatility as the ongoing conflict with Iran drives up oil prices, stoking fears of inflation and unsettling investors that seek safety in fixed income assets during geopolitical crisis.
Bonds are no longer a safe haven. Their total market value fell sharply in March.
Bloomberg data shows that global bond markets have lost more than $2.5 trillion, making it the asset class’s worst month in over three years.
The unusual sell-off highlights the growing concern among investors about the current shock, which could trigger a situation of stagflation, where prices rise in tandem with a slowing economy.
Oil shock disrupts traditional market dynamics
The sharp rise in energy costs following disruptions to the Strait of Hormuz is at the core of the market turmoil. This is a critical artery of global oil supply.
Brent crude, which hovers around $102 per bar on Tuesday, reached over $114 per barrel on Monday, after US President Donald Trump had threatened to “obliterate’ Iranian power plants if Tehran didn’t reopen Strait of Hormuz.
The price of oil has risen by 45% since the beginning of the conflict, from about $70 per barrel. At one point it reached as high as $119.
Geopolitical tensions have historically triggered a flight to security, driving investors into government bonds, and driving yields down.
This time however, the rise in oil prices has changed that dynamic.
Energy costs are directly linked to inflation, which reduces the real value of fixed income returns and makes bonds less attractive.
In response, yields have risen sharply in all major economies.
Bloomberg’s index shows that the total value of corporate, government and securitized debt has fallen to $74.4 trillion, down from nearly $77 trillion by the end of February. This represents a drop of approximately 3.1% for this month.
This is the steepest drop since September 2022 when aggressive monetary tightening from central banks shook markets.
Yields rise across major economies in the US and Europe
The rise in government borrowing costs has been widespread, with the United States, Europe and Asia all experiencing an increase in rates.
The yield on the 10-year bond in the United Kingdom soared to 4,927% on Friday. This is the highest level since 2008’s financial crisis. Meanwhile, the two-year bond yield rose to 4,522%.
The move reflected an abrupt reassessment of expectations regarding interest rates, with the markets now pricing multiple rate increases by the Bank of England.
Lale Akoner is a global market analyst for eToro. She said that the UK’s vulnerability was highlighted by the recent sell-off.
He noted that both the short- and longterm yields increased as investors demanded more compensation for inflation and fiscal risk, especially given the country’s vulnerability to energy prices.
The 10-year yield in Germany has also risen to its highest level since 2011.
Analysts note that Europe is particularly vulnerable to disruptions in energy supply due to the conflict.
On Monday, Treasury yields in the United States reached multi-month highs.
The benchmark 10-year rate rose to a peak of 4.4150% in Asia early before slipping slightly to 4.4095%. Meanwhile, the two-year rate hovered around a top of more than seven months of 3.9434%.
The yields temporarily retreated from their multi-month highs on Monday after US President Donald Trump announced that strikes against Iranian energy infrastructure will be paused as a result of what he called productive weekend talks with Tehran.
The respite was short-lived.
In Asian trading, Treasury yields resumed an upward trend on Tuesday. As hopes for a rapid de-escalation of the Middle East faded and inflation concerns returned to focus, Treasury yields began to rise.
The benchmark 10-year rate rose 4.6 basis point to 4.382%. This is close to the peak of Monday’s 4.445%. Meanwhile, the 30-year rate increased 3.3 basis points, to 4.946%.
Asian bond markets are under pressure
The bond markets in Asia are also under pressure.
In countries like India, Japan and South Korea, yields have increased, reflecting global spillovers as well as local vulnerabilities.
Higher oil prices in India pose a double challenge, as they increase inflation and widen the current account deficit.
Analysts at Nuvama warned the rupee may weaken to 95 per dollar. This would add further pressure on domestic debt and keep the 10-year yield around 6.80%.
The report also suggested the Reserve Bank of India could reduce its support for the bonds market, possibly reducing open-market operations as inflation risks increase.
Central banks face difficult trade-offs
The rise in yields has made it difficult for central banks to balance the slowing of growth with rising inflation.
BNP Paribas strategists have warned that if energy prices continue to rise and the labour market conditions remain stable, the Federal Reserve could be forced to consider rate increases.
In a similar way, policymakers at the European Central Bank have indicated their willingness to tighten policies if inflationary pressures continue.
Trinh Nguyen is a senior economist at Natixis. In a Bloomberg article, he said that higher inflation limits the ability of central banks to support growth. This forces some to tighten policy even when economic momentum is weakening.
Participants in the market increasingly see this current environment as a turning-point.
Charu Chanana is chief investment strategist at Saxo. He said investors are starting to price in a longer-lasting stagflationary shock rather than a geopolitical shock.
Investors question safe-haven assets
The ongoing sale of traditional safe-haven investments has also raised concerns about their reliability.
In the current economic climate, bonds, which are typically seen as a safe haven in times of uncertainty, do not provide any protection.
Reuters columnist Mike Dolan pointed out that both gold and bonds have struggled to protect portfolios. The former is still recovering from previous shocks and may require a recession to regain its defensive appeal.
Kathryn Rooney Vera is chief market strategist for StoneX Group. She said that markets are increasingly factoring the risk of stagflation. The duration of the conflict will likely determine the trajectory of the oil prices and inflation.
Investors are likely to remain cautious as geopolitical tensions continue. Bond markets reflect a complex interplay between inflation fears, policy uncertainties, and shifting expectations of global growth.
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