Middle East Tensions Trigger Global Bond Market Selloff: Safe-Haven Appeal Falters, Stagflation Concerns Resurface

Southern Finance, 21st Century Business Herald Reporter Hu Huiyin

The ongoing impact of Middle East geopolitical tensions continues—on March 9, a historic surge in global crude oil prices triggered market concerns about inflation expectations, which are now becoming the new dominant logic in the global bond market.

Since last week, government bonds in the U.S., Japan, Australia, South Korea, and European countries have been sold off successively, with U.S. and European bond markets suffering the heaviest losses. Due to soaring oil prices, market expectations for Fed rate cuts have been revised downward, now anticipating only one 25-basis-point cut this year, or possibly delaying until 2027. As a result, on March 10, at the close of trading in New York, yields on 2-year, 10-year, and 30-year U.S. Treasuries all hit new single-day highs. By 7 p.m. Beijing time on March 11, U.S. Treasury yields remained on the rise, with the 10-year yield reaching a new high of 4.163%, up 68 basis points.

The same scene unfolded in the European bond market. Amid the surge in energy import prices, markets began to expect the European Central Bank (ECB) to raise interest rates by about 30 basis points by the end of the year, contrasting sharply with the widespread expectation in February of a rate cut. On March 10, the yield on 2-year UK government bonds briefly soared to nearly a one-year high of 4.04%, up 6.2 basis points for the day; the German 2-year yield also reached its highest level since July 2024. Additionally, Asian bond markets experienced some correction, but the Australian 10-year government bond yield still rose by over 1%.

The global bond market is facing a major test. Industry insiders suggest that in the short term, rising risk aversion may support the bond market, but the potential inflationary pressures triggered by recent sharp swings in oil prices cannot be ignored.

Geopolitical risks have not eased, and whether this wave of bond sell-offs will continue remains a key market focus. More fundamentally, in the context of a rising global stagflation trend, how should Western countries balance the deep contradictions between addressing imported inflation and adjusting rate cut expectations?

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The Logic Behind Bond Sell-offs Is Changing

On March 9, international oil prices surged dramatically, with Brent and WTI crude oil both soaring over 30%, approaching $120 per barrel, hitting a three-year high. Unexpectedly, the bond market, once considered a safe haven, quickly became a heavy casualty. Within a single day, global bond markets experienced a fierce sell-off.

Although oil prices retreated the next day, falling below $90, U.S. Treasuries remained under selling pressure, and yields on UK, German, and Japanese bonds continued to rise. Some experts attribute this wave of global bond sell-offs to energy supply shocks and rekindled inflation expectations caused by geopolitical conflicts.

Dong Zhongyun, Chief Economist at China Aviation Securities, analyzed for 21st Century Business Herald that since the escalation of the U.S.-Iran conflict, the disruption of shipping through the Strait of Hormuz has directly driven up international oil and gas prices, rapidly fueling inflation fears and triggering a global bond sell-off.

Currently, European bond market volatility is more pronounced. As of 5 p.m. Beijing time on March 11, the German 10-year yield rose 11 basis points to 2.866%, the UK 10-year yield jumped over 100 basis points to 4.6%, and the French 10-year yield increased 43 basis points to 3.491%. “European bond volatility is indeed more significant, mainly because Europe relies heavily on energy imports, and disruptions in the Strait of Hormuz have a particularly large impact,” Dong Zhongyun said. The already fragile European economy faces greater “stagflation” risks, making ECB policy decisions more difficult, and market pressure to sell European bonds and adjust inflation expectations in the eurozone is more intense.

While the Middle East geopolitical situation remains tense, the traditional safe-haven asset—bonds—has shown signs of “failing,” sparking discussions about the “most secure assets.”

“Although bonds generally serve as a safe haven, their risk hedging effectiveness usually targets the ‘numerator’ factors of risk asset pricing, namely the overall economic outlook and profit expectations of risk assets. When risk asset yields decline, bonds tend to rise because of their fixed income nature,” said Ying Shiwen, Head of Research at Minyin International, to 21st Century Business Herald. “If the impact of risk events affects the ‘denominator’ factors, such as risk-free rates and inflation, bonds will struggle to hedge and may even decline. The current geopolitical conflict has increased global inflation expectations, leading markets to revise their monetary policy outlooks, ultimately pushing bond yields higher.”

It must be said that this round of global bond sell-offs was quite sudden, with 2-year yields in the UK, Germany, and the U.S. experiencing rare weekly increases. Some analysts interpret this as a shift from “safe-haven bond buying” to “rising inflation, more hawkish central banks, and re-evaluation of front-end rate cuts.”

Wang XinJie, Chief Investment Strategist at Standard Chartered China Wealth Solutions, explained to 21st Century Business Herald that the core logic behind this bond sell-off is not capital seeking safety but the market pricing in higher inflation premiums and a tighter monetary policy path. After the U.S.-Iran conflict, futures markets delayed expectations of Fed rate cuts and reduced bets on multiple cuts throughout the year. Investors now demand higher yields to compensate for potential future loss of purchasing power due to inflation and to reflect expectations of “higher for longer” policy rates.

Dong Zhongyun pointed out that this wave of global bond sell-offs reveals a deeper logic: when geopolitical conflicts threaten the core interest of the global energy supply chain, traditional “safe-haven” logic is overshadowed by “inflationary” concerns. Disruptions in the Strait of Hormuz, a major energy artery, directly push up global oil and gas prices. At this point, geopolitical events are no longer just risk disturbances but have evolved into “inflation generators” that directly raise global production and living costs. As market fears of “secondary inflation” and “stagflation” intensify, investors sell bonds, pushing up global yields.

The world is watching whether stagflation risks are emerging. Wang XinJie noted that the upcoming U.S. February inflation data is a key focus. The market consensus is that inflation remained stable before the conflict; if inflation exceeds expectations, the Fed may further delay rate hikes, and fears of stagflation could intensify in the short term.

The Tug-of-War Between Rate Cuts and Inflation?

As bond selling pressure continues to mount globally, market outlooks for bonds are not optimistic.

Dong Zhongyun said, “The U.S.-Iran conflict has quickly reset the global asset pricing logic, shifting the market’s focus from ‘data dependence’ to concerns over energy supply and runaway inflation. Until the situation clarifies, bond market volatility is expected to remain high.”

Some believe there may be an alternative path for bonds. Wang XinJie analyzed that high oil prices, while boosting inflation and hurting bonds, also suppress consumption and investment, increasing recession risks, which could benefit bonds. The market will be caught in a tug-of-war between these opposing forces, seeking the ultimate dominant logic.

Ultimately, the direction of the bond market hinges on the global inflation trend, especially whether stagflation will occur. Experts suggest that for energy-import-dependent countries like Japan, South Korea, and European nations, the impact will be most significant. Dong Zhongyun said that soaring oil and natural gas prices will directly impact their trade balances, increase corporate costs, and raise living expenses. In the near future, their central banks will face significant policy dilemmas: balancing currency depreciation pressures and considering whether to passively tighten monetary policy amid imported inflation.

Prior to this, the market had already priced in the monetary policy paths of European countries and the Federal Reserve. U.S. interest rate futures show that the expected rate cuts by the Fed this year have dropped sharply from 59 basis points before the conflict to just 40 basis points. Expectations for fewer rate cuts this year have increased, with some institutions even betting on ECB rate hikes.

Looking ahead at inflation trends, Dong Zhongyun said that in the short term, global inflation may rise sharply and broadly due to soaring energy prices. This is no longer “core stubbornness” but a direct “cost-push” inflationary pressure. As long as disruptions in the Strait of Hormuz persist or no effective supply-side interventions occur, fears of inflation will not subside, and bond yields are likely to continue rising—possibly until energy prices reach a level that “breaks demand” or geopolitical tensions ease substantially.

Wang XinJie also believes that the global bond market faces a divergence between “rate cut expectations” and “rising inflation.” In the short term, imported inflation will persist, but the ultimate inflation path depends on the conflict’s duration. If the U.S.-Iran conflict is short-lived, the market may face a period of moderate re-inflation; if it prolongs, the risk of stagflation will rise sharply. Short-term bond market movements are uncertain, but volatility will remain high.

“In summary, before Middle East tensions clarify, the bond market is unlikely to trend unilaterally. Bonds of energy-importing countries may experience more intense fluctuations. Once the market recognizes that high oil prices will lead to ‘stagflation,’ fears of recession may ultimately outweigh inflation fears, prompting funds to flock back into long-term government bonds for safety, which could limit or even reverse some countries’ bond yield increases,” Wang XinJie concluded.