Global government bond markets were headed for one of their worst weekly losses in months, on concerns that war in the Middle East will renew upward pressure on inflation and force more hawkish pivots from central banks.
Crude oil was set yesterday for its strongest weekly gain since the extreme volatility of the Covid-19 pandemic in spring 2020, as conflict in the Middle East halted shipping and energy exports through the vital Strait of Hormuz.
Some German bonds posted their largest yield increases in two years and some US short-term debt was on track for its worst week since the Liberation Day tariff turmoil.
“It’s still a bit unknown as to what’s going to be the top in oil and flow through to overall inflation,” Michael Lorizio, head of US rates and mortgage trading at Manulife Investment Management, said.
Investors seek higher yields when “the range of potential outcomes for the fundamental economy is widened,” he added.
The week’s bond selloff reflects in part a gain last week that pushed US yields lower than many analysts believe were justified by the economic outlook, Lorizio said.
Two-year government bonds, the most sensitive to shifting rate expectations, have taken the brunt of the selloff, remaining weak even after news that the US economy unexpectedly shed jobs last month.
Britain’s two-year bond, or gilt yield, has risen 43 basis points this week to the highest level since October.
It is on pace for the biggest weekly yield increase since May 2023.
Germany’s two-year yields hit their highest in a year and were poised for a 30-basis-point jump on the week, the biggest since April 2023.
US two-year yields gained 18 basis points on the week, the most since last April’s tariff turmoil.
Traders have ramped up bets that the European Central Bank may hike rates soon as energy costs have surged, potentially exacerbating price pressures on other goods and services from food to travel.
“Inflation expectations have become much more important to central banks after they were really burned in 2022,” James Rossiter, head of global macro strategy at TD Securities in London, said.
The moves have been global: Australia and Canada have both seen their borrowing costs rise around 20 basis points this week.
Yields rise as prices of bonds fall.
The selling has also spilled over into corporate bond markets.
The iTRAXX Europe Crossover index – which captures the cost of insuring against the risk of default on a basket of high-yield corporate debt – was around 287 basis points yesterday and reached 190.5 basis points, its widest since June.
A similar measure of investment-grade credit, the iTRAXX Europe Main, reached its widest since May 2025, moving past 60 basis points.
“However the conflict is resolved, it has already undermined our previous assumption that energy prices would remain low and stable this year,” Berenberg chief economist Holger Schmieding said.
The ECB is very unlikely to change rates at its next meeting and will make any decisions on a meeting-by-meeting basis, ECB policymaker Jose Luis Escriva said yesterday.
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