Global bonds slide as inflation fears intensify

The global bond market ended a volatile week under pressure on Friday, as investors reacted to mounting concerns that the Iran war is beginning to inflict broader economic damage.

Government bond yields climbed sharply across major economies as traders increasingly priced in the possibility that central banks may need to raise interest rates faster than previously expected.

The growing concerns stem from inflationary pressures linked to surging energy prices following the conflict.

Benchmark US Treasury yields rose to their highest levels in around a year, reflecting expectations that the Federal Reserve may be forced to tighten monetary policy further to contain inflation driven by higher oil prices.

Treasury yields climb as inflation worries deepen

Benchmark 10-year Treasury notes were last yielding 4.53%, up 7.3 basis points on the day and hovering around their highest level since last June.

The selloff in bonds was not limited to the United States.

European government bonds also faced heavy pressure during early trading hours on Friday.

Italian 10-year yields surged nearly 9 basis points to around 3.87%, bringing the total weekly increase to nearly 14 basis points.

Germany’s benchmark Bund yields climbed almost 6 basis points to around 3.11%.

French government bonds also came under pressure, while Japanese bond yields reached record highs during the session.

Markets have become increasingly concerned after recent inflation data showed consumers and businesses are beginning to experience significant price increases as a result of the conflict.

Crude oil prices have risen by more than 50% since the start of the war, intensifying fears of a prolonged inflation shock.

Short-term yields react sharply to rate expectations

Two-year government bond yields, which are highly sensitive to changes in interest rate and inflation expectations, have posted some of the sharpest increases this week.

However, investors have also started selling longer-dated bonds, indicating growing concern that the economic impact from higher energy prices could persist over a longer period.

The move higher in long-term yields suggests markets are increasingly worried not only about inflation but also about weaker economic growth and rising government borrowing needs.

This refers to a market situation where yields on longer-dated government bonds rise faster than those on shorter-term debt.

Such a move typically reflects investor expectations of sustained inflation, larger fiscal deficits, and higher long-term borrowing costs.

UK gilts remain volatile amid political uncertainty

In the United Kingdom, gilt yields remained highly volatile throughout the week.

British government bond yields climbed to their highest levels in decades as political uncertainty intensified following significant Labour party losses in local elections.

Pressure has reportedly been building on Prime Minister Keir Starmer to resign, while potential leadership challengers have also emerged, adding another layer of uncertainty for financial markets.

The combination of geopolitical tensions, rising inflation pressures, and political instability has left global bond investors facing one of the most turbulent trading weeks in recent months.

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