(March 9): Global bond markets fell on Monday as an oil price shock prompted investors to price in higher inflation and a deteriorating economic growth outlook.
Yields on benchmark 10-year US Treasuries rose more than three basis points to 4.17%, while the rate on policy-sensitive two-year notes jumped four basis points. Traders scaled back expectations for the Federal Reserve’s next quarter-point rate cut to September. Before the Middle East war erupted, traders had fully priced in a move by July. Bond options show some traders betting the Fed may not cut rates at all this year.
The moves were more aggressive in Europe and the UK: swaps imply a 60% chance of the European Central Bank hiking rates twice this year and slightly less than a 50% probability of the Bank of England raising borrowing costs once by the end of the year. German two-year yields surged nine basis points to 2.40% and their UK equivalents soared as much as 30 basis points to 4.17%, the biggest increase since October 2022.
The broader bond rout reflects anxiety about the global economy after crude oil surged towards US$120 ($154) a barrel, up almost 80% since the Iran war began and disrupted shipments from the Middle East. Sustained price increases could force central banks to keep policy tight to curb inflation even as growth slows, leaving the world grappling with stagflation.
“A weeklong halt in Hormuz shipping is driving a fast-escalating energy shock, lifting oil and gas prices, boosting the US dollar and global yields, and challenging 2026 consensus trades as stagflation risks rise,” Oversea-Chinese Banking Corp strategists including Sim Moh Siong wrote in a note.
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The economic toll would be significant. A 10% rise in energy costs that persists for a year would lift global inflation by about 0.4 percentage points and shave up to 0.2 percentage points off growth, according to the International Monetary Fund. Bloomberg Intelligence says demand destruction tends to set in when crude hits US$133, highlighting the risks if prices continue to climb.
Supply strain
Investors are bracing for a prolonged conflict, suggesting the oil spike may not be short-lived. Iran’s selection of the late Ayatollah Ali Khamenei’s son as the next supreme leader signals continuity in Tehran’s stance and little shift in its approach to the war. Meanwhile, output cuts in Kuwait and the United Arab Emirates highlight the growing supply strain after the closure of Hormuz.
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In the US, recent data have added to concerns about a potential stagflationary mix. Employers unexpectedly cut jobs in February and the unemployment rate rose, pointing to cracks in the labour market just as price pressures intensify.
“Oil is arguably the single most important input into global inflation,” said Tim Murray, a capital market strategist in the Multi-Asset Division at T Rowe Price. With most Asian economies significant net oil importers, that creates a “relative headwind for the region in a risk-off environment”, he added.
The Bloomberg Dollar Spot Index trimmed gains after the Financial Times reported that Group of Seven finance ministers would discuss a possible joint release of oil reserves with the International Energy Agency.
Bonds fell across Asia, with benchmark yields climbing by double-digit figures in Australia, New Zealand and South Korea. Indonesian and Japanese debt markets also slumped, with the 10-year yen government yields surging by 11.5 basis points, while European bond futures retreated.
Chinese government bonds declined as well, with 30-year bond futures posting their biggest drop of the year. The asset had initially outperformed global peers after the Iran war began, but confidence in its resilience is being eroded by fears of imported inflation as oil prices push higher.
Uploaded by Chng Shear Lane
