Global Bond Rout Grows as Oil Upends Interest-Rate Outlook

(Bloomberg) — Global bond markets fell on Monday as an oil price shock prompted investors to price in higher inflation despite risk to the economic growth outlook.

Yields on benchmark 10-year US Treasuries rose more than three basis points to 4.17%, while the rate on policy-sensitive two-year notes jumped four basis points. Traders expect the Federal Reserve’s next quarter-point rate cut no earlier than September. Before the US attacked Iran on Feb. 28, traders had fully priced in a move by July. Bond options show some traders are betting the Fed won’t cut rates at all this year.

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The moves were more aggressive in Europe and the UK: swaps imply a 60% chance of the European Central Bank hiking rates twice this year and a slightly less than 50% probability of the Bank of England raising borrowing costs once by the end of the year. German two-year yields surged nine basis points to 2.40%, their UK equivalents as much as 30 basis points to 4.17%, the biggest increase since October 2022.

The broader bond rout reflects anxiety about the global economy after the global benchmark for crude oil surged toward $120 a barrel, up almost 80% since the Iran war began and disrupted shipments from the Middle East. Sustained price increases could force central banks to keep policy tight to curb inflation even as growth slows, leaving the world grappling with stagflation.

“A weeklong halt in Hormuz shipping is driving a fast‑escalating energy shock, lifting oil and gas prices, boosting the US dollar and global yields, and challenging 2026 consensus trades as stagflation risks rise,” Oversea-Chinese Banking Corp strategists including Sim Moh Siong wrote in a note.

The economic toll would be significant. A 10% rise in energy costs that persists for a year would lift global inflation by about 0.4 percentage points and shave up to 0.2 percentage points off growth, according to the International Monetary Fund. Bloomberg Intelligence says demand destruction tends to set in when crude hits $133, highlighting the risks if prices continue to climb.

Supply Strain

Investors are bracing for a prolonged conflict, suggesting the oil spike may be sustained. Iran’s selection of the late Ayatollah Ali Khamenei’s son as the next supreme leader signals continuity in Tehran’s stance and little shift in its approach to the war. Meanwhile, output cuts in Kuwait and the United Arab Emirates highlight the growing supply strain after the closure of Hormuz.