Global bond yields surge rapidly; three weeks of war completely overturn central bank policy expectations.

Global bond yields surge rapidly; three weeks of war completely overturn central bank policy expectations.

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The global bond market is undergoing a dramatic repricing triggered by an energy price shock. As the war in the Middle East continues to escalate and oil prices remain high, concerns about persistent inflation are rapidly spreading, leading to a complete reversal in expectations for interest rate cuts by major central banks, now betting on rate hikes.

The yield on the UK 10-year government bond rose to 4.94% during Friday’s session, the highest since the 2008 global financial crisis. Bank of England Governor Andrew Bailey warned that monetary policy must "address the risk of more persistent inflation," with all nine members of the Monetary Policy Committee voting unanimously to keep rates unchanged at 3.75%, but the language has clearly turned more hawkish.

Meanwhile, ECB Governing Council member Joachim Nagel stated that if price pressures increase further, the ECB could consider raising rates as soon as next month. In the US, traders have fully withdrawn their bets on Fed rate cuts this year.

The shift in market sentiment reflects investors' deep concerns about the prolonged nature of the war. The Goldman Sachs trading desk noted that clients who previously expected the Iran war to end quickly are starting to waver, with some now anticipating a stock market correction or a repeat of the sustained declines seen in 2022. Brij Khurana of Wellington Management remarked: "Previously, the market generally believed the situation would calm down relatively quickly, but now, fears that the conflict may drag on for a long time are finally starting to spread in the market."

UK becomes the epicenter of bond market turmoil

The UK bond market has suffered the most severe shocks in the current round of sell-offs. The 10-year yield climbed as much as 10 basis points in a day to 4.94%, with short-term yields rising even more—2-year yields jumped 13 basis points on Friday to 4.53%, a cumulative rise of 100 basis points since the war broke out at the end of February.

Traders’ bets on Bank of England rate hikes this year continue to heat up. The market has now priced in a cumulative 87 basis points of hikes for the year, equivalent to three 25-basis-point increases, with about a 50% probability of a fourth hike. This is a stark contrast to three weeks ago—when the market widely expected the Bank of England would cut rates at this week’s meeting due to a weakening labor market.

James Athey, fund manager at Marlborough Investment Management, pointed out that in the context of rising inflation expectations and a more hawkish Bank of England, any narrowing of fiscal space by the government will only make things worse for UK bond investors. He added: "The market is struggling to find direction amid violent fluctuations and disrupted correlations, which is to be expected in an environment of shocks and extreme uncertainty."

ECB rate hike expectations surge

Eurozone bond markets are also under pressure, with the yield on Germany’s 10-year government bond hitting its highest level since 2011.

Interest rate swap contracts linked to ECB policy meetings show the market has fully priced in three 25-basis-point hikes this year, with cumulative rate hike expectations for the year reaching 79 basis points, up from 70 basis points on Thursday. Traders now believe there is a 75% chance the ECB will start raising rates as soon as next month.

Energy prices are the core driver behind the shift in expectations, with global benchmark Brent oil briefly breaking through $110. Nagel’s remarks provided policy support for market bets on rate hikes, further strengthening expectations of a shift in eurozone monetary policy.

Amid violent bond market swings, gold also took a heavy hit. Spot gold prices fell about 7% this week, with cumulative losses since March exceeding 11%, to around $4,699 per ounce. If the monthly loss holds, it will be the biggest single-month decline since 2008.

Analysis shows that this round of declines is driven by both technical and fundamental factors. Spot gold prices broke below the 50-day moving average this week and briefly touched the 100-day moving average—which has served as an important support level since 2023. The comprehensive upward adjustment in interest rate expectations is the underlying logic weighing on gold prices, because gold does not generate interest income and its appeal falls sharply in a high-interest-rate environment.

Gold mining stocks also slumped, and physical gold ETFs continued to see outflows. According to Bloomberg-compiled data, related funds saw net outflows for the third consecutive week, with holdings cumulatively down more than 60 tons. Former JPMorgan precious metals trader Robert Gottlieb warned: "Don’t buy the dip—the current volatility is too great."

Risk Warning and DisclaimerThe market has risks; investment needs caution. This article does not constitute personal investment advice and has not taken into account any individual user's special investment goals, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this carries personal responsibility. ```