(This March 3 story has been corrected to fix the pricing of ECB rate bets, in paragraph 22) A sharp two-day selloff in global government bonds underscores how the U.S.-Israeli air war against Iran is straining markets already on edge over inflation. The Reuters Iran Briefing newsletter keeps you informed with the latest developments and analysis of the Iran war. Sign up here. Bond prices tumbled on fears that a prolonged war against Iran would boost energy prices and sideline hopes for central-bank rate cuts. Yields pared their gains throughout the U.S. trading day, reflecting optimism among traders stateside that the conflict won't spiral into a lengthy crisis and on a stronger U.S. position in energy than European peers. Advertisement · Scroll to continue
The action is the latest sign that government bonds’ longstanding status as a safe haven that prospers when markets turn rough is under pressure, adding complexity to already fraught trading decisions. INFLATION CONCERNS The spike in energy prices comes as many central banks including the Fed are struggling with above-target inflation. "This is coming at a phase of the Fed's policy cycle where they are not in a position to be looking through transitory price increases," said Will Compernolle, macro strategist at FHN Financial. A divided Fed is expected to keep rates steady for several months on concerns about still elevated price pressures. Advertisement · Scroll to continue
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Market volatility, with U.S. Treasury yields initially rallying on news of the conflict, also showed uncertainty over how it will ultimately impact the economy. "The market is really struggling to find its footing. So, I think that explains the big intraday ranges," said Compernolle. ECB Chief Economist Philip Lane told the Financial Times in an interview that a prolonged Middle East war could cause a substantial spike in euro zone inflation and reduce economic growth. Two-year yields rose but were off their earlier highs. Britain's were last at 3.732% after earlier reaching 3.84% — up from 3.516% on Friday, its biggest two-day yield increase since October 2024. German two-year yields climbed to 2.177%, and got to 2.236%, the highest in a year and the biggest two day rise in a year. U.S. two-year yields were at 3.498%, up from a low of 3.365% on Monday, and got as high as 3.599%. That is the biggest two-day rise since June.
"Nobody knows how long this will take," said JP Powers, CIO at RWA Wealth Partners. "The only knowable impact is on energy markets, so positioning means extended inflation fears."
