By Ankur Banerjee
SINGAPORE, March 9 (Reuters) - Bonds across the globe sank on Monday as a rapidly worsening U.S.-Israeli war with Iran pushed oil prices well above $115 per barrel, spurring investor fears over inflation risks and what it could mean for the interest rate outlook.
Oil prices soared more than 20% to their highest since July 2022 as the week-long war led some major oil producers in the region to cut supplies and concerns of prolonged disruption to shipping through the Strait of Hormuz
rattled investors.
"The spike in oil price is a clear function of uncertainty as to the duration of the conflict," said George Boubouras, head of research at K2 Asset Management, noting that higher oil prices are a drag to future global growth and can be inflationary.
The spectre of rising inflation and the possibility of central banks needing to keep rates higher for longer or even hike borrowing costs has meant the safe-haven allure of bonds is being overlooked.
Instead, bond investors are rapidly repricing how interest rates might look in the near term. Traders have pushed back the timing for the next rate cut from the Federal Reserve to September from earlier expectation of June or July.
Governments in Asia are also scrambling to limit the impact on economies and consumers, with South Korea aiming to cap fuel prices for the first time in nearly 30 years.
SOARING YIELDS
Three-year Australian government bond yields surged 16 basis points to 4.592%, the highest since mid-2011. Ten-year government bond yields gained 13 bps to 4.977%. Bond yields rise when prices fall.
In Tokyo, Japanese government bond yields jumped across the curve, with the yen also feeling the pressure from the jump in oil prices. [JP/]
In the broader market, investors sold stocks as well as precious metals, turning risk averse with the U.S. dollar gaining favour.
"This chaos in the financial markets is all about the Strait of Hormuz... This oil shock won't end until ships can sail freely through the Strait," said Ed Yardeni of New York-based Yardeni Research.
"Until then, the financial markets are likely to become increasingly concerned about a 1970s-style stagflation scenario," he said, where growth stalls even as prices rise.
The two-year U.S. Treasury yield, which is highly sensitive to Fed policy expectations, gained 5.9 basis points to 3.6146%, after rising over 17 bps last week. [US/]
German and French debt futures also slid on Monday, suggesting the selloff will extend into Europe. Bund futures were down 0.46%, while French OAT futures fell 0.67%.
Iran on Monday named Mojtaba Khamenei to succeed his father Ali Khamenei as supreme leader, signaling that hardliners remain firmly in charge.
Charu Chanana, chief investment strategist at Saxo, said markets are seeing the new Iranian leader as a hardliner with close ties to the Revolutionary Guards, which may be a signal that policy continuity and confrontation risk remain high.
"For investors, crude starts becoming a real macro worry when it stops being a one-day spike and starts feeding into inflation, margins and policy expectations," Chanana said.
(Reporting by Ankur Banerjee in Singapore; Editing by Lincoln Feast and Sam Holmes)
