Global Government Bonds Sold Off... “Soaring Oil Prices Will Fuel Inflation”

[The Financial News]


Government bonds in major economies around the world are facing heavy selling pressure.
Despite the geopolitical instability of the Iran war, which would normally push investors into safe-haven government bonds, the market has moved in the opposite direction. The war in the Middle East has sent international oil prices soaring, stoking inflation, and investors are dumping government bonds and demanding higher yields as compensation.
As investors sell off government bonds, yields—which move inversely to prices—are jumping, adding the burden of higher financing costs to the real economy.

The Iran war is triggering a sell-off in major countries’ government bonds. Yields, which move in the opposite direction of bond prices, are climbing rapidly.
According to Consumer News and Business Channel (CNBC), the yield on the U.S. 10-year Treasury note, a benchmark for global interest rates, rose as much as 0.41 percentage points intraday on the 6th (local time) to 4.187%. It was the steepest one-day sell-off in a year. The yield later eased 0.037 percentage points to close at 4.109%, but the upward trend has continued.
Financial Times (FT) reported that the yield on the 10-year UK government bond (gilt) jumped 0.39 percentage points to 4.62%. It was the sharpest weekly rise since 2022.
Short-term government bonds have also been hit hard.
The yield on the 2-year German government bond (Bund) surged 0.3 percentage points to 2.31%. The weekly gain was the largest in three years, since 2023.
The Bloomberg Global Aggregate Bond Index, which tracks trends in government and corporate bonds worldwide, is on track for its worst week since October 2024.

With oil prices—the basic cost input for all industries—soaring, demand for government bonds as safe assets has weakened despite the wartime geopolitical crisis, creating the unusual situation of yields, which move inversely to prices, spiking higher.
When oil prices jump, logistics and production costs rise, and inflation ultimately accelerates.
This becomes the biggest obstacle to central banks cutting interest rates.
Thomas Barkin, president of the Federal Reserve Bank of Richmond, said on the 5th, “If a sharp rise in energy prices pushes up inflation expectations, the Federal Reserve System (Fed) will have no choice but to hesitate on rate cuts,” adding, “The timing of rate cuts that markets had been expecting will be pushed back.” He warned, “If oil climbs above $100 a barrel, the Fed’s policy pivot scenario will completely collapse,” and stressed, “The market is no longer asking ‘when will they cut?’ but rather ‘will they be able to cut at all?’”
If rate cuts are delayed, demand for government bonds weakens. Investors have little incentive to hold bonds that pay lower coupons now when new issues with higher yields are expected later.
If inflation worsens, the real purchasing power of the fixed interest paid by government bonds erodes. As a result, investors demand higher yields and dump government bonds, pushing down their prices and driving up yields, which move in the opposite direction.

Some analysts are now suggesting not just a pause, but the possibility that interest rates could actually rise.
In the swap market, traders are pricing in a 0.25 percentage point increase in the European Central Bank (ECB)’s benchmark rate this year. Expectations have swung sharply from additional rate cuts to a hike.
Mike Riedel, a fund manager at Fidelity International, noted, “We are not in panic yet, but the bullish case for global government bonds based on expectations of near-term rate cuts is disappearing.” He pointed out, “If fears take hold that inflation is slipping out of control, government bonds will no longer be seen as safe assets but as ‘locked-in losses.’”
However, markets expect the impact on the United States—now an energy exporter—to be smaller than on other countries. Due to the weak employment report for February released that day, forecasts are emerging that the Fed will cut rates twice this year by 0.25 percentage points each. This is only a slight pullback from the two to three cuts expected before the Iran war.
When demand for government bonds weakens and yields rise, market interest rates climb, raising companies’ funding costs and hurting their earnings. For this reason, rising government bond yields are highly damaging to stock markets.


dympna@fnnews.com Song Kyung-jae Reporter