Global bond markets retreated on Monday after oil prices surged near $120 per barrel, driven by escalating conflict in Iran. The sharp rise in energy costs renewed worries about inflation and raised doubts over the timing and direction of central bank rate policy, prompting a broad move out of bonds and into the U.S. dollar.
Crude prices jumped more than 20%, reaching levels last seen in July 2022, as supply reductions by key Middle East exporters and fears of further shipping disruptions through the Strait of Hormuz unsettled markets. Major sovereign bond yields responded quickly, with the U.S. 10-year Treasury climbing over seven basis points—the steepest single-day increase since January—and pressures spreading to global debt markets.
Australia’s three-year yield hit its highest point since 2011, while German bund futures slipped to lows not recorded in nearly 15 years. Japan’s government bonds also experienced gains in yields across durations, and the yen weakened alongside a broader retreat from risk assets.
The U.S. two-year Treasury yield, sensitive to monetary policy expectations, advanced by nearly six basis points to 3.6146%, extending a rise that exceeded 17 basis points the previous week. Equity and precious metals markets also came under pressure as investors favored the safety of the dollar amid deepening risk aversion.
Central banks could face increasing pressure to maintain tighter policy to contain inflation if energy prices remain elevated, potentially at the expense of economic growth, raising the threat of stagflation. Bond markets now anticipate a later start to rate cuts by the Federal Reserve, moving their projections from June or July to September.
According to the International Monetary Fund, a sustained 10% increase in energy prices over a year could lift global inflation by approximately 0.4 percentage points while reducing output by 0.2 percentage points. Bloomberg Intelligence noted that demand typically weakens if oil prices approach $133 per barrel, underscoring the risk of further escalation.
Prolonged conflict remains a concern for investors, with Iran’s leadership transition signaling no change in the country’s current stance, while deeper output cuts in Kuwait and the UAE add to supply constraints following the closure of the Strait of Hormuz.
Recent U.S. labor data, showing job cuts and a rising unemployment rate in February, have added to worries about weakening growth as inflationary pressure intensifies.
With conflict disrupting supply chains and economic indicators showing strain, investors are preparing for persistent volatility driven by oil and interest rate uncertainties.
