The bond market is once again asserting its traditional role of intimidating governments and investors, as fears of an inflation shock stemming from the Iran war continue to escalate. The sell-off that gripped markets last week is persisting this morning, driving up borrowing costs for governments from Tokyo to Washington DC.
Impact of the Iran War on Energy Prices
With the Strait of Hormuz still largely closed, the prospect of a prolonged period of oil and gas shortages is growing. This would push up costs for energy, transport, and food, further fueling inflationary pressures. Last Friday, global government borrowing costs soared, with the yield on Japan’s 30-year bond hitting 4% for the first time. US and eurozone debt also suffered as traders bet that central banks will be forced to raise interest rates or abandon hopes of rate cuts to stem the inflationary waves hitting the global economy.
Analyst Insights on Energy and Interest Rates
Analysts at ING highlighted that even if the war were to end tomorrow, energy prices may not fall as far as many expect. Significant drawdowns in oil inventories are likely to keep upward pressure on prices for some time. Additionally, natural gas prices currently appear too low, with meaningful upside risk if disruptions persist into the third quarter, particularly as competition intensifies between Asian and European buyers for LNG. They emphasized that for all the political noise, energy prices will remain the dominant force for central banks. This is why they expect rate hikes from the Bank of England and European Central Bank in June, and why they no longer expect a Federal Reserve rate cut until December.
Current Market Movements
This morning, US and Japanese government bonds have extended their losses, pushing yields higher. Benchmark 10-year US Treasury yields jumped to their highest since February 2025 at 4.6310%. Yields on the 30-year Japanese government bond hit a record high of 4.200%, while the 10-year yield reached its highest since October 1996 at 2.800%.
The agenda for today includes G7 finance ministers meeting in Paris and the IMF presenting its Article IV report into the UK at 10am BST.
