Global bond yields surge as three weeks of war completely overturn central bank policy expectations

The global bond market is undergoing a severe repricing triggered by energy price shocks. As the war in the Middle East escalates and oil prices remain high, concerns about the persistence of inflation are rapidly spreading, leading to a complete reversal of interest rate cut expectations among major central banks, which are now betting on rate hikes. The yield on the UK 10-year government bond rose to 4.94% during trading on Friday, the highest level since the 2008 global financial crisis. Bank of England Governor Andrew Bailey warned that monetary policy must "address the risks of more persistent inflation impacts." The nine members of the Monetary Policy Committee unanimously voted to keep the interest rate unchanged at 3.75%, but the language has clearly turned hawkish. Meanwhile, European Central Bank Governing Council member Joachim Nagel stated that if price pressures continue to build, the ECB may consider raising interest rates as early as next month. In the United States, traders have completely withdrawn their bets on the Federal Reserve cutting rates this year. The shift in market sentiment reflects deep concerns among investors about the protraction of the war. Goldman Sachs' trading desk indicates that clients who previously expected the Iran war to end quickly are beginning to waver, with some clients now anticipating a market correction or a repeat of the sustained decline seen in 2022. Brij Khurana of Wellington Management stated, "The market previously believed that the situation would calm relatively quickly, but now the fear that the conflict may drag on for a long time is finally starting to spread in the market." The UK Becomes the Epicenter of Bond Market Turmoil The UK bond market has borne the brunt of this round of sell-offs. The 10-year yield rose by as much as 10 basis points in a single day to 4.94%, while the short-end yields saw even more significant increases— the 2-year yield rose by 13 basis points to 4.53% on Friday, marking a cumulative increase of 100 basis points since the war broke out at the end of February. Traders' bets on the extent of rate hikes by the Bank of England this year are heating up. The market is currently pricing in a total rate hike of 87 basis points for the year, equivalent to three 25 basis point hikes, with about a 50% probability of a fourth hike. This stands in stark contrast to three weeks ago when the market widely expected the Bank of England to cut rates at this week's meeting due to a weakening labor market. James Athey, a fund manager at Marlborough Investment Management, pointed out that any narrowing of fiscal space for the government amid rising inflation expectations and a hawkish stance from the Bank of England will further complicate matters for UK bond investors. He added, "The market is struggling to find direction amid severe volatility and correlation disruptions, which is to be expected in an environment of shocks and extreme uncertainty." ECB Rate Hike Expectations Surge The Eurozone bond market is also under pressure, with the yield on German 10-year government bonds reaching its highest level since 2011 Interest rate swap contracts linked to the European Central Bank's policy meeting show that the market has fully priced in three rate hikes of 25 basis points each this year, with a cumulative rate hike expectation of 79 basis points for the year, up from 70 basis points on Thursday. Traders currently believe there is a 75% chance that the ECB will initiate its first rate hike as early as next month. Energy prices are the core driving force behind this shift in expectations, with the global oil benchmark Brent crude price briefly surpassing $110. Nagel's statements provide a policy-level endorsement for market rate hike bets, further reinforcing expectations for a shift in Eurozone monetary policy. Gold Faces Heavy Losses, Popular Trades Collapse While the bond market experiences severe volatility, gold has also been hit hard. Spot gold prices have fallen about 7% this week, with a cumulative decline of over 11% since March, currently reported at approximately $4,699 per ounce. If the decline persists until the end of the month, it will mark the largest monthly drop since 2008. According to analysis, this round of decline is driven by both technical and fundamental factors. Spot gold prices fell below the 50-day moving average this week and briefly touched the 100-day moving average—the latter has served as an important support level since 2023. The comprehensive adjustment of interest rate expectations is the fundamental logic suppressing gold prices, as gold does not generate interest income, making it significantly less attractive in a high-interest-rate environment. Gold mining stocks have also plummeted, and physical gold ETFs continue to face outflows. According to data compiled by Bloomberg, related funds have recorded net outflows for three consecutive weeks, with total holdings decreasing by over 60 tons. Robert Gottlieb, a former precious metals trader at JP Morgan, warned: "Do not buy the dip—current volatility is too high."