A sell-off in global bonds has accelerated, driven by renewed inflation fears stemming from a historic surge in crude oil prices on March 9. The escalating geopolitical tensions in the Middle East are reshaping market logic, with government bonds across the United States, Japan, Australia, South Korea, and European nations facing significant selling pressure since last week. U.S. and European bond markets have been particularly hard hit.
As oil prices skyrocketed, markets sharply revised down expectations for Federal Reserve interest rate cuts this year, now anticipating only a single 25-basis-point reduction, potentially delayed until 2027. By the New York close on March 10, yields on U.S. 2-year, 10-year, and 30-year Treasury notes had all hit fresh daily highs. As of 7:00 p.m. Beijing Time on March 11, U.S. Treasury yields continued their ascent, with the 10-year yield climbing 68 basis points to 4.163%, setting another new high.
A similar trend unfolded in European bond markets. Soaring imported energy prices led markets to price in approximately 30 basis points of interest rate hikes by the European Central Bank before year-end, a stark contrast to the widespread expectation of further rate cuts in February. On March 10, the UK 2-year government bond yield surged to a near one-year high of 4.04%, up 6.2 basis points for the day. Germany's 2-year bond yield also reached its highest level since July 2024. While some Asian bond markets experienced partial pullbacks, Australia's 10-year bond yield still recorded an increase of over 1%.
The global bond market is undergoing a significant test. Industry analysis suggests that while heightened risk aversion may provide some short-term support, the potential inflationary pressures from recent extreme oil price volatility cannot be overlooked.
With geopolitical risks persisting, whether this global bond sell-off will continue remains a key market focus. A more fundamental question arises: against a backdrop of rising global "stagflation" concerns, how will Western economies balance the deep-seated conflict between managing imported inflation and adjusting their interest rate cut expectations?
The rationale behind the bond sell-off has shifted. On March 9, international oil prices staged an historic rally, with Brent and WTI crude both soaring nearly 30% at one point, approaching the $120 per barrel mark and hitting three-year highs. Surprisingly, bonds, traditionally seen as safe-haven assets, became a casualty. The global bond market experienced a fierce sell-off within a single day.
Although oil prices subsequently retreated sharply, falling below $90 per barrel a day later, U.S. Treasuries remained under selling pressure, and yields on UK, German, and Japanese government bonds continued to rise. Some experts attribute this wave of selling to energy supply shocks and reignited inflation expectations triggered by geopolitical conflict.
Dong Zhongyun, Chief Economist at AVIC Securities, analyzed that since the escalation of U.S.-Iran tensions, disruptions to shipping in the Strait of Hormuz have directly propelled international oil and gas prices higher. Market concerns about inflation subsequently intensified rapidly, triggering a global bond sell-off.
Currently, volatility is more pronounced in the European bond market. As of 5:00 p.m. Beijing Time on March 11, Germany's 10-year bond yield rose 11 basis points to 2.866%, the UK's 10-year yield surged over 100 basis points to 4.6%, and France's 10-year yield increased 43 basis points to 3.491%. "The volatility in European bonds is indeed more significant, primarily because Europe is highly dependent on energy imports, making it particularly vulnerable to shipping disruptions in the Strait of Hormuz," Dong Zhongyun stated. He added that the already weak European economy faces heightened "stagflation" risks, complicating policy decisions for the European Central Bank and leading to more intense selling pressure on European bonds and sharper adjustments to eurozone inflation expectations.
Despite ongoing Middle East tensions, the failure of bonds—a traditional safe-haven asset—has sparked discussions about the "optimal safe asset." Ying Xiwen, Head of Research at Minsheng Royal Asset Management, explained that while bonds typically act as a hedge, they protect against risks affecting the "numerator" in asset pricing—overall economic prospects and risk asset earnings expectations. When risk asset returns fall, bonds, offering fixed returns, tend to rise. However, if a risk event impacts the "denominator"—the risk-free rate and inflation—bonds cannot provide a safe haven and will instead fall. The current geopolitical conflict has raised global inflation expectations, corresponding to a shift in market expectations for monetary policy, ultimately leading to higher bond yields.
This global bond sell-off has been notably abrupt, with 2-year bond yields in the UK, Germany, and the U.S. experiencing rare sharp weekly increases. Analysis indicates this reflects a market narrative not of "safe-haven bond buying," but of "rising inflation, more hawkish central banks, and a reassessment of front-end rate cut trades."
Wang Xinjie, Chief Investment Strategist at Standard Chartered Wealth Management Solutions in China, argued that the core logic of this bond market sell-off is not a flight to safety, but rather markets pricing in higher inflation premiums and a tighter monetary policy path. Following the U.S.-Iran conflict, futures markets pushed back expectations for the timing of Fed rate cuts and reduced bets on the magnitude of cuts for the year. Consequently, investors are demanding higher bond yields to compensate for potential future purchasing power losses due to inflation and to reflect expectations that policy rates may stay "higher for longer."
In Dong Zhongyun's view, this sell-off reveals a deeper logic: when geopolitical conflict directly threatens core interests like the global energy supply chain, the traditional "safe-haven logic" is overridden by "inflation logic." The conflict disrupting transport through the Strait of Hormuz—a key energy "artery"—has directly caused a spike in global oil and gas prices. In this scenario, the geopolitical event is no longer just a traditional risk perturbation but has evolved into an "inflation generator" directly increasing global production and living costs. It is precisely due to a sharp rise in fears about "secondary inflation" or even "stagflation" that investors are selling bonds, thereby pushing up global bond yields.
Attention is turning to whether stagflation risks are emerging. Wang Xinjie noted that the upcoming U.S. February inflation data is a key market focus. The consensus expects inflation to have remained stable before the conflict erupted; if the figure exceeds expectations, the Fed might further delay rate cuts, and short-term stagflation worries would intensify.
As global bond selling pressure continues to mount, the outlook for the bond market is not optimistic. Dong Zhongyun stated, "The U.S.-Iran conflict has, in the short term, reset the pricing logic for global assets, rapidly shifting the market's focus from 'data dependence' to concerns about energy supply and uncontrolled inflation. Until the situation clarifies, bond market volatility is expected to remain elevated."
An alternative view suggests a different path for bond markets. Wang Xinjie analyzed that while high oil prices boost inflation—a negative for bonds—they also suppress consumption and investment, thereby increasing recession risks, which in turn benefits bonds. The market will wrestle between these bullish and bearish forces to determine the ultimate dominant logic.
Ultimately, the direction of the bond market hinges on the global inflation trajectory, particularly the potential for stagflation. Experts believe countries highly dependent on energy imports, like Japan, South Korea, and European nations, will be most affected. Dong Zhongyun said soaring crude oil and natural gas prices will directly impact their trade balances, raise corporate costs, and increase living pressures for citizens. In the coming period, the Bank of Japan and the Bank of Korea will face significant policy dilemmas: needing to address currency depreciation pressures while also considering whether to tighten monetary policy passively in the face of imported inflation.
Prior to this, markets had already priced in certain monetary policy paths for the Fed and European central banks. U.S. interest rate futures now show expectations for Fed rate cuts this year have plummeted from 59 basis points pre-conflict to just 40 basis points. Expectations for rate cuts from the Bank of England and the European Central Bank have also been revised down simultaneously, with some institutions even beginning to bet on potential ECB rate hikes.
Looking ahead at the inflation trajectory, Dong Zhongyun indicated that in the short term, global inflation could see a significant and broad-based uptick due to the energy price surge. This is no longer about "stubborn core inflation" but direct, comprehensive "cost-push" inflationary pressure. Going forward, as long as the Strait of Hormuz remains obstructed or there are no clear and effective supply-side interventions, market inflation panic will not subside, and bond yields will find it easier to rise than fall. "We might see yields continue to climb from current high levels until energy prices become high enough to 'destroy demand' or there is a substantive easing of the geopolitical situation."
Wang Xinjie also believes divergent expectations exist in global bond markets between "rate cut expectations" and "rising inflation." In the short term, imported inflation pressures will persist, but the ultimate inflation path depends on the conflict's duration. If the U.S.-Iran conflict is brief, markets might face a period of mild reflation. If it prolongs, stagflation risks will increase substantially. While short-term bond market direction is divided, volatility will remain high.
"In summary, until the Middle East situation clarifies, the bond market is unlikely to establish a clear unilateral trend. Bonds of net energy importers may experience more剧烈 volatility. Once the market confirms that high oil prices will lead to economic 'stagflation,' fear of recession may ultimately outweigh fear of inflation, prompting funds to return to long-term government bonds for safety, thereby limiting the upside for some countries' bond yields or even pushing them lower," Wang Xinjie concluded.
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