Global government bonds slid towards their biggest monthly losses in more than a year as investors weighed the risks from a prolonged war in the Middle East on inflation and growth.
However, some relief for short-dated debt on Monday suggested markets were shifting focus towards the economic fallout of a conflict showing few signs of de-escalation as it entered a second month.
The two-year U.S. Treasury yield – which moves inversely to its price – was set for a monthly rise of roughly 50 basis points (bps), its largest since October 2024, although it retreated roughly 4 basis points in Asia to 3.8770%.
Australia’s three-year yield was up about 50 bps for the month, the most in 17 months, despite easing more than 9 bps on Monday to 4.715%.
Japan’s two-year government bond yield was up 12.5 bps for March, after dipping 2 bps to 1.36%.
Monday’s respite followed a climb to multi-month peaks for short-end bond yields in March.
“Now that the reality is sort of sinking in that perhaps the oil price might stay high for a bit longer, given that it’s hard to see an end to the war anytime soon, the growth impact is starting to become more of a focus,” said Moh Siong Sim, a strategist at OCBC.
“The buzzword here is stagflation,” he said. “Initial focus was on inflation. Now the ‘stag’ bit is moving into the picture, and that’s perhaps explained why short-end bond yields have come off.”
Oil prices remain firmly above $100 per barrel, leading investors to bet on higher-for-longer global interest rates.
That dynamic has overshadowed the traditional safe-haven allure of sovereign debt.
Investors currently wager the Federal Reserve will leave rates on hold this year, while the European Central Bank and Bank of England are seen raising rates at least twice over the remainder of 2026.
The five-year U.S. Treasury yield was set for a monthly gain of roughly 51 bps, its largest since October 2024, while the benchmark 10-year yield was headed for a roughly 43 bps rise.
Eugene Leow, senior rates strategist at DBS, said the “marked deterioration” in bids at the recent two-year and five-year U.S. Treasury auctions underscores the “significant stresses” facing the market.
“Investors are clearly on the sidelines amidst uncertainties over how the Iranian conflict will play out,” he said.
In Australia, 10-year yields are up 42 bps for the month, the most in 17 months. Japan’s 24.5 bps rise in its 10-year yield would mark the steepest advance since December.
Chinese government bonds have held up relatively well compared to peers as investors bet the world’s second-largest economy will be better insulated from the oil shock due to its ample crude stockpiles, dominance in green energy and subdued consumer price inflation.
Ten-year Chinese government bonds are up only slightly this month, while two-year bonds have climbed more than 10 bps, set for their largest monthly rise since December 2024.