Global government bond yields rise across the board on inflation worries

South Korea’s 10-year at 3.570%; 10-year sovereign yields in major countries up 6bp to more than 10bp

“Inflation fears overwhelm safe-haven demand”

The U.S.-Israel war against Iran is stoking inflation fears across global financial markets. As a result, heavy selling in government bonds has pushed yields sharply higher for a second straight day in most countries, including the U.S., the U.K., Japan and South Korea.

According to Bloomberg on the 3rd (local time), the U.K.’s 10-year gilt yield at one point jumped as much as 17 basis points (1BP=0.01%), but was up 11bp at 4.48% as of this time.

The 10-year U.S. Treasury yield also rose 5bp to 4.09%, extending the prior day’s increase. Japan’s 10-year government bond yield climbed 7bp to 2.13%, and Germany’s 10-year yield also rose 7bp to 2.78%. Australia’s 10-year yield likewise surged at one point to as much as 14bp.

South Korea’s 10-year government bond yield also jumped 12.5bp to 3.570% today. Bond yields and prices move in opposite directions.

The Bloomberg Global Treasury Index fell 0.8% on the 2nd, marking its biggest daily drop since May last year.

The weakness in government bonds reflects worries that inflation could intensify as oil and gas prices surge. Bloomberg reported that traders in New York, London and Sydney sold government bonds heavily the prior day on concerns the Middle East conflict could be prolonged.

U.S. President Donald Trump initially said it would “take up to about four weeks,” but vowed to “take all necessary measures.” Bond-market participants are therefore factoring in the possibility that the conflict involving Iran could last longer than initially expected.

Gareth Berry, a strategist at Macquarie Bank, noted that “contrary to conventional wisdom, when shocks in the Middle East put energy flows at risk, global bonds see yields rise on selling rather than benefiting from safe-haven demand.” He added that “this is especially true when the market has been pricing in rate cuts and that suddenly looks less likely.”

Selling pressure is proving stronger in bond markets that had expected rates to remain on hold for an extended period, or that had been anticipating further rate cuts—such as from the U.S. Federal Reserve or the Bank of England.

Philip Lane, the European Central Bank’s (ECB) chief economist, said that if a prolonged Middle East war and declines in oil and gas supplies persist, “inflation could surge significantly.” Markets that as recently as last Friday put the probability of an ECB rate cut at 40% now see the chance of a rate hike as close to 50%.

Australia’s central bank governor Michele Bullock warned that rates could be raised this month due to inflation concerns. Australia’s bond yields accordingly surged as much as 14bp on Tuesday.

According to a report by Manish Kabra of Societe Generale, five oil-supply shocks over the past 50 years have, on average, pushed down 10-year government bond prices over the subsequent one-week, three-month and six-month periods—meaning yields rose.

By contrast, China’s bond prices held up relatively well. On the 2nd, yields were little changed and bond futures rose. That was seen as reflecting expectations for monetary easing ahead of the National People’s Congress (Two Sessions).

Monica Defend, head of Amundi Institute, said “the Iran crisis shows that geopolitical factors are emerging as a key driver shaping the macroeconomy,” adding that “energy volatility, inflation uncertainty and regional dispersion have become defining features of the market.”

Kim Jeong-a, contributing reporter kja@hankyung.com