From Europe to Asia, bond markets are reeling with oil vaulting above $115

By York Behsley and Ankur Banerjee

LONDON/SINGAPORE, March 9 (Reuters) – Bonds around the world sank on Monday as the U.S. and Israel’s escalating conflict with Iran pushed oil prices above $115 a barrel, raising investor fears about inflation and how central banks would react.

Oil prices rose 28% to $120 a barrel – the highest since July 2022 – as the weeks-long conflict forced some of the region’s biggest oil producers to cut supplies and investors continued to worry about a prolonged disruption in transit through the Strait of Hormuz. Brent crude was up 16% to around $107.

And Iran on Monday named Mojtaba Khamenei as Supreme Leader to succeed his father, Ali Khamenei, in a sign that hardliners remain firmly in power.

“There’s a lot of panic today,” said Lynn Graham-Taylor, senior rate strategist at Rabobank in London.

Investors are “netly pricing in an energy supply shock on the inflation side of the focus of central banks. There is relatively limited downside pricing from a GDP perspective,” he said.

The tendency for inflation to rise and the likelihood of central banks holding rates higher for longer or even needing to raise borrowing costs means that the safe-haven appeal of bonds is being overshadowed by the conflict.

The bond accelerates sales

On Monday, government bond yields rose further as rates fell, adding to last week’s dramatic moves.

Investors headed into the end of the year with two rates from the European Central Bank, a big change from February, when the risk was another rate cut.

They are also pricing in a chance that the Bank of England will raise rates this year, having seen a March cut likely before the war. Expectations of a Fed rate cut have been pulled back.

The UK faced a sell-off pressure, with two-year yields rising nearly 40 basis points, setting them for their biggest daily jump since former prime minister Liz Truss’s failed 2022 economic plan.

In Germany, yields rose 11 bps, the highest since July 2024.

The moves followed jumps of around 30 bps each week, as European markets proved particularly vulnerable to a sell-off given the region’s dependence on energy imports.

In contrast, long-term bond yields rose in Japan, another energy importer, while the yen also felt pressure from rising oil prices. (JP/)

Those moves were mostly contained in the US, the world’s largest producer of liquefied natural gas, where two-year yields were last 7 bps higher.

Stagnation scenario

While investors are more concerned about the inflation outlook, analysts say bond market movements are more likely due to position changes as investors are already betting on a higher yield curve and lower short-term yields as central banks cut interest rates.

Investors say the UK is particularly vulnerable to changes in its position.

Analysts see little chance for calm until then, with signs of an end to the conflict.

“This chaos in the financial markets is all about the Strait of Hormuz… This oil shock will not end until ships can pass through the Strait freely.”

“Until then, financial markets will become increasingly concerned about the stagflation scenario of the 1970s,” he said, where growth stagnates even as prices rise.

G7 finance ministers will discuss the possible release of emergency oil reserves on Monday, a French government source said.

In the broader market, investors sold stocks and precious metals, risking the US dollar’s gains.

But some analysts said risk assets still signaled a more positive outlook than the bond market.

“Market repricing suggests a scenario where oil stays above $100 for months. But in that scenario we should see a much faster appreciation of equity markets,” said Jefferies economist Mohit Kumar.

(Reporting by York Behsley and Ankur Banerjee in Singapore; Editing by Sam Holmes, Dara Ranasinghe and Toby Chopra)