Iran conflict slams global bond markets, wiping out $2.5 trillion in value in March and set for the largest monthly decline since 2022!

The Middle East conflict has dealt a heavy blow to the global bond market. Fueled by soaring oil prices pushing up inflation expectations, the global bond market lost more than $2.5 trillion in value in March, on track for the biggest monthly decline since September 2022, with the shadow of stagflation looming over the market.

On March 23, according to Bloomberg aggregate indices, the total market value of global government bonds, corporate bonds, and securitized debt has dropped from nearly $77 trillion at the end of February to $74.4 trillion, a monthly decline of 3.1%. This downturn is particularly notable, as geopolitical turmoil usually drives capital into bonds for safe haven, but this time the trend has clearly deviated from the norm.

On Monday, tensions in the Middle East continued to escalate. According to Xinhua News Agency, Iran’s armed forces issued a statement saying that if US President Trump’s threat to attack Iranian power plants is carried out, Iran will immediately take four “punitive” measures, including a full closure of the Strait of Hormuz until its damaged power facilities are rebuilt. Bond market sell-offs accelerated, with markets rapidly pricing in stagflation expectations and multiple central banks facing pressure to raise rates amid an economic downturn.

Bond Market Drop Hits Three-Year High, Sovereign Bonds Lead

This round of bond market declines is led by sovereign bonds. According to Bloomberg data, the global sovereign bond index fell 3.3% in March, while corporate bonds dropped 3.1%. Although the bond market’s shrinkage is less than the roughly $11.5 trillion loss in the global stock market, this trend is still unusual for fixed income assets that typically act as a safe haven during turmoil.

Rising oil prices directly erode the real yield value of fixed-income bonds, driving rapid increases in interest rates across different maturities. U.S. Treasury yields have risen to multi-month highs, marking the third consecutive week of declines. Asia-Pacific has not been immune: government bond yields in India, Japan, and Korea have all risen; on Monday, Australia’s 10-year government bond yield reached its highest level since 2011; New Zealand’s yield for the same maturity also set a new high since May 2024.

Stagflation Expectations Rise, Central Banks Caught in Dilemma

Persistently high oil prices are forcing major central banks to reassess their monetary policy paths. BNP Paribas’ rate strategy team pointed out in a client report last week that if energy prices remain high and the job market stays stable, the Fed may signal a rate hike at its April meeting.

Joachim Nagel, a member of the European Central Bank Governing Council, said last week that if the Iran war further increases price pressure, the ECB may consider a rate hike as soon as next month. Nuan Zhen, senior economist at East Asia Bank in Hong Kong, noted, “Higher inflation pressure limits central banks’ room to maneuver. Some central banks will be forced to raise rates during an economic downturn to curb inflation and prevent currency depreciation.”

StoneX Group chief market strategist Katherine Rooney Vera said in an interview with Bloomberg TV, “The market is starting to price in what I think is an imminent stagflation shock, and the longer this war drags on, the higher oil prices may go.”

Whether the current slump in the bond market will continue depends largely on the direction of the conflict and the actual degree of disruption to oil supplies. The overlap of narrowing central bank policy space, rising geopolitical risk premiums, and worsening growth prospects is making the situation increasingly difficult for fixed-income investors.

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