Global government bond markets look set to record their biggest monthly fall in years as investors reassess the economic consequences of a prolonged conflict in the Middle East. With the war now entering its second month, traders are weighing two competing effects: upward pressure on inflation from higher energy prices and a potential drag on global growth.
Much of the damage has concentrated in short-dated, rate-sensitive securities. Selling pressure in those maturities has begun to ease, but heavy losses remain across major bond markets in the United States, Europe and Asia.
In the United States, the two-year Treasury yield - which moves inversely to the price of the instrument - was poised for a monthly increase of roughly 50 basis points, its largest one-month rise since October 2024. At the time of reporting the two-year was trading down about 5 basis points at approximately 3.87%.
The benchmark 10-year Treasury yield climbed 44 basis points over the month to near 4.39%, though it too was trading lower on Monday. Analysts said that Monday’s modest pullback in yields might reflect a growing market focus on the war’s potential to slow global growth rather than primarily boosting inflation.
"Now that the reality is sinking in that perhaps the oil price might stay high for a bit longer, given that it’s hard to see an end to the war anytime soon, the growth impact is starting to become more of a focus," said Moh Siong Sim, a strategist at OCBC.
Oil prices remain firmly above $100 per barrel, up from about $70 in late February, and are on track to finish March with their largest monthly percentage gain since at least 1988.
European bond markets have registered even more dramatic moves. Market pricing now reflects expectations for two or three interest-rate increases from the European Central Bank and the Bank of England this year. That marks a sharp swing in the Bank of England’s case, where markets had been positioned for two rate cuts before the conflict began.
In Britain, the two-year gilt yield rose 98 basis points this month, marking its largest monthly increase since the market turmoil of 2022, while the 10-year yield gained 77 basis points. Germany’s two-year yield jumped 69 basis points to 2.66% and its 10-year yield added 45 basis points; the 10-year German yield had reached a 15-year high of 3.13% last week. Italy, viewed by investors as particularly vulnerable to an energy shock relative to other euro zone economies, experienced moves almost comparable with Britain: its two-year yield rose 85 basis points and the 10-year increased 78 basis points over the month.
Despite the larger monthly increases, euro zone yields were slightly lower on Monday, a move that may reflect the same evolving narrative in which growth concerns are gaining prominence relative to inflation worries.
"It’s a very difficult situation for the ECB and every central bank in this stagflation scenario to balance the risk of inflation ... and not hurting the economy even more by raising rates too much," said Berenberg senior economist Felix Schmidt.
Across the Asia-Pacific region, bond markets have diverged. Australia’s three-year bond yield rose by roughly 50 basis points over the month, the largest monthly increase in 17 months, though it eased more than 9 basis points on Monday to about 4.72%. Japan’s 10-year yield would record a 25-basis-point monthly rise, the steepest monthly advance since December.
In contrast, Chinese government bonds have held up comparatively well. Investors appear to be betting that China, as the world’s second-largest economy, may be better shielded from the oil shock because of its significant crude stockpiles, dominance in green energy, and relatively subdued inflation. Chinese two-year bond yields have fallen by more than 11 basis points and are set for their largest monthly decline since December 2024.
Overall, markets have largely abandoned earlier assumptions of Federal Reserve easing this year. That reassessment, combined with the spike in oil prices and the unclear outlook for the conflict’s duration, has driven yields higher and produced significant markdowns in government bond prices across regions.
While some intraday and near-term easing in yields was visible on Monday, the broad monthly picture points to sharp repricing across maturities and geographies as investors work through the twin risks of higher inflation and weaker growth amid geopolitical uncertainty.