Bond rout deepens after Iran talks collapse

Global bond markets fell on Monday as the collapse of US-Iran peace talks shifted investor attention away from hopes of de-escalation and back towards a harsher inflation outlook, with oil above $100 a barrel reinforcing bets that central banks will keep borrowing costs elevated for longer. Government bond yields moved higher across major markets as traders reassessed how persistent energy-driven price pressure could alter the path of monetary policy in the United States, Europe and parts of Asia.

The sell-off reflected a sharp reversal in market thinking. During the brief ceasefire, investors had begun to edge back towards the view that rate cuts might still emerge later this year if energy markets stabilised. That calculation weakened after the weekend breakdown in talks and Washington’s announcement of a naval blockade targeting Iranian maritime activity. Brent crude jumped more than 7% to about $102 a barrel, reviving fears that the energy shock could broaden into higher transport, manufacturing and consumer costs across import-dependent economies.

Bond investors are now confronting a familiar but more uncomfortable question: whether central banks will have to keep policy tight even as growth risks rise. In the euro zone, traders moved decisively towards a higher-for-longer interest-rate outlook, with markets swinging from expectations of cuts to pricing in the possibility of several European Central Bank increases over the coming quarters. Yields rose across sovereign debt markets, with heavily indebted issuers particularly exposed as investors demanded more compensation for inflation and fiscal risk at the same time.

Pressure was also evident in the United States, where higher oil prices and a firmer dollar reduced expectations for Federal Reserve easing. Treasury yields climbed in Asian trading, with the move led by shorter and intermediate maturities, a sign that investors expect policy to stay restrictive rather than shift quickly towards cuts. Gold, which might ordinarily benefit from geopolitical stress, slipped as traders favoured the dollar and adjusted to the prospect of tighter real rates. That combination underlined how inflation worries, rather than pure flight-to-safety buying, were driving the day’s market response.

Asia offered a more mixed but equally telling picture. In Japan, Bank of Japan Governor Kazuo Ueda warned that the Middle East conflict and the rise in crude prices required close monitoring because of their potential effects on output, supply chains and inflation expectations. That caution captures the dilemma facing policymakers: energy costs can lift headline inflation, but a prolonged conflict can also weaken demand and corporate activity. Markets have already pared confidence in an immediate Japanese rate increase, even though the weaker yen and imported inflation argue for vigilance.

Emerging markets with heavy energy import bills looked especially vulnerable. Local equities, currencies and bonds in South Asia came under renewed strain as oil climbed and foreign investors continued to pull money from riskier assets. The rupee fell sharply, benchmark government bond yields rose, and equities dropped as traders absorbed the implications of costlier crude and tighter external financing conditions. Those moves matter beyond one market because they illustrate how the inflation shock from the Gulf can quickly spill into countries where current-account balances, fuel subsidies and consumer prices are already under pressure.