Global bond markets are witnessing heightened volatility as the ongoing conflict involving Iran drives oil prices higher, stoking inflation fears and unsettling investors who typically seek safety in fixed-income assets during geopolitical crises.
Instead of acting as a haven, bonds have come under pressure, with their total market value falling sharply in March.
More than $2.5 trillion has been wiped off global bond markets, putting the asset class on track for its worst monthly performance in over three years, according to Bloomberg data.
The unusual sell-off highlights a growing concern among investors that the current shock could trigger a stagflationary environment, where rising prices coincide with slowing economic growth.
Oil shock disrupts traditional market dynamics
At the heart of the market turmoil is the sharp rise in energy prices following disruptions in the Strait of Hormuz, a critical artery for global oil supplies.
Brent crude, which is hovering around $102 per barrel on Tuesday, had reached over $114 a barrel on Monday after US President Donald Trump threatened to “obliterate” Iranian power plants if Tehran did not reopen the Strait of Hormuz.
It has gone up by 45% from approximately $70 per barrel before the conflict started, with the price spiking to as high as $119 at one point.
Traditionally, geopolitical tensions trigger a flight to safety, pushing investors into government bonds and driving yields lower.
This time, however, the surge in oil prices has altered that dynamic.
Higher energy costs feed directly into inflation, eroding the real value of fixed-income returns and making bonds less attractive.
As a result, yields, which move inversely to prices, have climbed sharply across major economies.
The total value of government, corporate, and securitised debt has dropped to $74.4 trillion from nearly $77 trillion at the end of February, based on a Bloomberg index, marking a decline of about 3.1% this month.
This represents the steepest fall since September 2022, when aggressive monetary tightening by central banks rattled markets.
Yields climb across major economies of US and Europe
The rise in yields has been broad-based, with government borrowing costs increasing in the United States, Europe, and Asia.
In the United Kingdom, the yield on the 10-year gilt surged to 4.927% on Friday, its highest level since the 2008 financial crisis, while the two-year yield climbed to 4.522%.
The move reflected a sharp reassessment of interest rate expectations, with markets now pricing in multiple rate hikes by the Bank of England.
Lale Akoner, global market analyst at eToro, said the sell-off underscored the UK’s vulnerability to external shocks.
He noted that both short- and long-term yields rose as investors demanded greater compensation for inflation and fiscal risks, particularly given the country’s sensitivity to energy prices.
Germany has also seen borrowing costs climb, with the 10-year yield reaching its highest level since 2011.
Analysts point out that Europe’s dependence on imported energy leaves it especially exposed to supply disruptions stemming from the conflict.
In the United States, Treasury yields hit multi-month highs on Monday.
The benchmark 10-year yield rose to an eight-month peak of 4.4150% early in Asia before retreating slightly to 4.4095%, while the two-year yield hovered near a more than seven-month top of 3.9434%.
Yields briefly pulled back from these multi-month highs during Monday’s session after US President Donald Trump said strikes on Iranian energy infrastructure would be paused following what he described as productive weekend talks with Tehran.
However, the respite proved short-lived.
Treasury yields resumed their upward trajectory in Asian trading on Tuesday as hopes for a swift de-escalation in the Middle East faded, bringing inflation concerns back into focus.
The benchmark 10-year yield rose 4.6 basis points to 4.382%, moving closer to Monday’s peak of 4.445%, while the 30-year yield advanced 3.3 basis points to 4.946%.
Asian bond markets feel the pressure
Bond markets in Asia have also come under strain.
Yields in countries such as India, Japan, and South Korea have moved higher, reflecting global spillovers and local vulnerabilities.
For India, higher oil prices pose a dual challenge by pushing up inflation and widening the current account deficit.
Analysts at Nuvama warned that the rupee could weaken toward 95 per dollar, adding further pressure on domestic bonds and keeping the 10-year yield elevated around 6.80% or higher.
The report also suggested that the Reserve Bank of India may scale back its support for the bond market, potentially reducing open market operations as inflation risks intensify.
Central banks face difficult trade-offs
The surge in yields has complicated the outlook for central banks, which must now balance slowing growth with rising inflation.
Strategists at BNP Paribas have warned that the Federal Reserve may need to consider rate hikes if energy prices remain elevated and labour market conditions stay stable.
Similarly, European Central Bank policymakers have signalled readiness to tighten policy if inflationary pressures persist.
Trinh Nguyen, senior economist at Natixis, said in a Bloomberg report that higher inflation limits central banks’ ability to support growth, forcing some to consider tightening policy even as economic momentum weakens.
Market participants increasingly see the current environment as a turning point.
Charu Chanana, chief investment strategist at Saxo, said investors are beginning to price in a more durable stagflationary impulse rather than a short-lived geopolitical shock.
Investors question safe-haven assets
The ongoing sell-off has also raised questions about the reliability of traditional safe-haven assets.
Bonds, typically seen as a refuge during times of uncertainty, have failed to provide protection in the current environment.
Reuters columnist Mike Dolan noted that both bonds and gold have struggled to shield portfolios, with the former still recovering from earlier shocks and potentially requiring a recession to regain their defensive appeal.
Kathryn Rooney Vera, chief market strategist at StoneX Group, said markets are increasingly factoring in the risk of stagflation, with the duration of the conflict likely to determine the trajectory of oil prices and inflation.
As geopolitical tensions persist, investors are likely to remain cautious, with bond markets reflecting a complex interplay of inflation fears, policy uncertainty, and shifting expectations for global growth.