LONDON, March 6 - Major government bond markets around the world closed the week with pronounced losses as investors reassessed the inflation outlook in light of conflict in the Middle East. Two-year government bonds, which are particularly sensitive to changes in rate expectations, experienced the steepest moves.
In the United Kingdom, two-year gilt yields rose by almost 40 basis points over the week, marking what is set to be the largest single-week increase since August 2024. On Friday, UK borrowing costs reached their highest level since October. In Germany, two-year yields climbed to their highest point in a year and were positioned for the biggest weekly jump since April 2023.
Market participants have increased wagers that the European Central Bank could move to lift rates as soon as May, amid a spike in energy costs that may add to price pressures across a range of goods and services, from food to travel. "However the conflict is resolved, it has already undermined our previous assumption that energy prices would remain low and stable this year," said Berenberg chief economist Holger Schmieding.
Energy markets reflected the shock: Brent crude oil was headed for its steepest weekly advance since the onset of Russia's full-scale invasion of Ukraine in February 2022, with Brent crude futures jumping roughly 17% over the week.
Moves were evident in the deepest bond pool as well. U.S. Treasuries saw two-year yields climb by 25 basis points this week, on track for the biggest weekly rise since last April's tariff turmoil. Elsewhere, Australia recorded an almost 20 basis point increase in short-term borrowing costs.
Yields rise as the prices of bonds fall. Markets remain sensitive to supply shocks after the disruptions that followed the COVID crisis in 2020 and the energy shock triggered by Russia's invasion of Ukraine in 2022, episodes that sent energy prices sharply higher and prompted global central banks to respond with sizeable rate increases.
Summary
Global two-year government bond yields posted large weekly gains as the recent conflict in the Middle East revived concerns over rising energy prices and renewed expectations of earlier interest rate hikes by major central banks. The moves were led by sharp increases in the UK, followed by Germany, the United States and Australia, while Brent crude futures surged about 17% for the week.
Key points
- Short-term government bond yields rose sharply - two-year gilt yields in the UK climbed almost 40 basis points, the largest weekly rise since August 2024.
- Energy prices jumped - Brent crude futures surged roughly 17% during the week, driving renewed inflation concerns and bets on earlier central bank tightening.
- Broad market impact - Two-year U.S. Treasury yields rose about 25 basis points, and Australian short-term borrowing costs increased nearly 20 basis points, underscoring a global repricing of rate expectations.
Risks and uncertainties
- Elevated energy prices could sustain upward pressure on inflation - this affects sectors exposed to input costs and consumer prices, including food and travel.
- Earlier-than-expected central bank rate hikes - faster tightening would increase borrowing costs across economies, impacting government funding, corporate financing and mortgage markets.
- Market sensitivity to supply shocks - past episodes show that disruptions can prompt pronounced volatility in bond and energy markets, leaving investors and policymakers with limited visibility on near-term inflation dynamics.