Global bond markets staged a rally after a late Tuesday announcement of a ceasefire, yet analysts and investors caution that yields are unlikely to retrace to pre-war levels. Even if the pause in hostilities holds, the energy shock that helped spark the selloff is expected to leave inflation and oil prices elevated for some time, undermining the case for early rate cuts and limiting the scope for a sustained bond-market recovery.
Markets reacted quickly when the U.S. and Iran appeared to reach terms for a temporary halt in strikes. The White House said President Donald Trump announced a two-week pause in attacks, contingent on the Strait of Hormuz being reopened and Tehran providing assurances of safe passage for ships. That news pushed Brent crude lower, helped equities climb and prompted rallies in Treasuries and other government bonds.
Still, investors noted that the optimism did not fully erase the shift in monetary-policy expectations that came before the violence. Pre-war wagers that central banks in the United States, Britain and oil-producing Norway would cut rates this year have largely evaporated, and most market participants do not expect those tight timing assumptions to return.
Some market strategists now argue that the ceasefire could even increase the chance of higher rates rather than cuts. With the immediate threat of severe oil shortages diminished, the risk of growth slowing enough to justify policy easing has fallen, meaning central banks may remain on a higher-for-longer footing.
Analysts point to the energy shock as a stark reminder that many major economies have struggled for years to bring inflation back to target. That persistent inflation backdrop has forced a reassessment among bond investors, who suffered heavy losses during the war-driven repricing of risk.
The FTSE World Government Bond Index fell more than 3% in March, marking its steepest monthly drop in one and a half years. "Sometimes these events, even when unwound, have changed the psyche of what the likely next move is for most central banks," said Andrew Lilley, chief rates strategist at Barrenjoey, a Sydney-based investment bank. "This temporary oil price shock has brought investors closer to the truth, which is that actually inflation has been persistently high for the last three years."
Real-world crude prices earlier this week reached record highs and remain elevated as supply tightness continues to weigh on markets. That uncertainty about energy security is evident in central-bank thinking: a survey by Central Banking Publications found that more than two-thirds of central banks view geopolitics as the top risk to the outlook.
Policymakers have already signalled caution. On Wednesday, India and New Zealand left policy rates unchanged at 5.25% and 2.25% respectively, but both central banks prepared the ground for possible hikes in the future. In explaining its decision, the Reserve Bank of New Zealand said, "The balance of risks has shifted, and there are likely to be differences between the near term and medium term. Any signs of significant second-round inflationary effects or increases in medium-term inflation expectations would require decisive and timely increases in the OCR to re-anchor inflation expectations."
The broad market response to the ceasefire was positive: equities jumped, the safe-haven dollar weakened and Brent crude dipped below $100 a barrel for the first time in two weeks. Government bond yields in the United States, Europe, Britain and Australia also fell, but only back to levels seen in mid-March rather than to the considerably lower levels that prevailed before the conflict.
Benchmark U.S. Treasury yields were quoted at about 4.85% for the 10-year and 3.72% for the two-year, figures that are roughly in line with the current federal funds rate. Many analysts who acknowledge that equities could advance further if peace holds still expect short-term yields to have limited room to fall, given central banks' narrower policy flexibility.
Fed funds futures, which at the start of the year priced in two U.S. rate cuts for 2026, now imply only about a 50% chance of a single cut. "Central banks will be on high alert that this supply shock does not feed into higher inflation expectations," said Prashant Newnaha, senior rates strategist at TD Securities in Singapore. "Rate cuts should be off the table."
Signals point toward higher policy rates in several economies. In Japan, the ceasefire appears to have reduced immediate worries over Gulf energy supplies, removing an obstacle for the Bank of Japan. "The BOJ was totally willing to raise rates without this Middle East uncertainty. And now this ceasefire will give a good reason for them to go ahead and raise rates in April," said Naka Matsuzawa, chief strategist at Nomura Securities in Tokyo. "All the other conditions, including wages and inflation, were all met already."
Even in China, where policymakers have contended with low inflation for years, major global banks are walking back earlier forecasts that had expected rate cuts this year. That shift reflects the broader idea that the global policy trajectory is less likely to be easing-focused in the near term.
There remains scope for bond prices to rally from current levels, particularly because selling was heavy in March and positioning had been aggressive in anticipating a string of rate hikes in Europe and Britain. Still, the ceasefire's removal of a sharp recession risk has nudged central banks away from cutting and toward a wait-and-see or tightening stance instead.
As India's central bank governor Sanjay Malhotra put it on Wednesday, "Risks are on the upside." For bond investors, that signal means the path back to pre-war yields is narrower than it appeared before the conflict: markets may find rallies, but a full return to earlier expectations for rate cuts and lower yields looks unlikely unless inflation and energy dynamics change materially.
Summary
The temporary ceasefire eased oil and risk-asset stress, prompting rallies in stocks and bonds, but persistent inflationary pressure from the energy shock and a recalibration of rate-cut expectations by central banks make a full rebound to pre-war bond levels unlikely. Policymakers are focused on guarding against second-round inflation effects and have signalled readiness to hike or hold, rather than cut, keeping yields higher for longer.