The bond market collapsed! Iran conflict reignites inflation fears, global bond gauges drop the most since May last year

# Xu Chao

Source: Wall Street CN

Inflation Fears Retake Global Fixed-Income Markets; Government Bonds Sold Off Broadly from Sydney to Tokyo

The Bloomberg Global Aggregate Bond Index fell 0.8% in a single day on Monday, its steepest one-day drop since May. The U.S. 10-year Treasury yield surged 10 basis points on Monday. Amid rising geopolitical risks, a new wave of **stagflation** is sweeping the global economy, with its ultimate impact hinging on the conflict’s duration and scope.

As the Middle East conflict reignites, the traditional safe-haven logic of the bond market is unraveling. Inflation concerns have reclaimed dominance in global fixed-income markets, triggering widespread selling of government bonds from Sydney to Tokyo.

Government bonds in the U.S., Japan, Australia, New Zealand, South Korea, and Indonesia all posted losses this week. The Bloomberg Global Aggregate Bond Index dropped 0.8% on Monday, marking its largest single-day decline since May last year. The U.S. 10-year Treasury yield jumped 10 basis points on Monday; Australia’s 10-year yield rose as much as 12 basis points to 4.75% on Tuesday; and Japan’s 10-year yield climbed 6 basis points on Tuesday.

According to CCTV News, local time on Monday, March 2, Trump stated that the “big wave” of strikes against Iran has not yet begun, and operations could last four to five weeks—with the U.S. prepared for a far longer timeline. The U.S. defense secretary said no ground troops have been deployed into Iran, and no options are ruled out.

Mohamed El-Erian, former CEO of PIMCO, warned that amid rising geopolitical risks, a new wave of **stagflation** is sweeping the global economy, with its ultimate impact dependent on the conflict’s duration and spread. Multiple market participants cautioned that this scenario could drive sustained selling in global bond markets.

## Energy Shock Pushes Yields Higher; Easing Expectations Repriced

This round of bond selling has upended conventional market logic. Normally, geopolitical crises tend to drive capital into safe-haven assets like government bonds, pushing yields lower. But expectations of rising energy prices stemming from the Iran conflict are breaking this traditional pattern.

Gareth Berry, a strategist at Macquarie Bank, noted:

> Contrary to popular belief, energy supply risk shocks in the Middle East typically push global bond yields higher, not lower. This effect is particularly pronounced now, as monetary easing expectations were already priced in—and those expectations now suddenly look unachievable.

Mark Cranfield, a Bloomberg market strategist, also said:

> Overnight signals from the U.S. Treasury market are negative, and it will be an even worse day for Asia-Pacific fixed-income markets. Moreover, a weak auction result for Japan’s 10-year government bonds could trigger broader bond selling.

For investors, uncertainty over the conflict’s duration and scope has put inflation fears back at the forefront, steadily eroding the safe-haven appeal of sovereign bonds during periods of geopolitical tension.

## Geopolitics Returns to the Macro Stage: A Structural Shift May Be Underway

The primary source of inflationary pressure is surging oil and gas prices. Roughly one-fifth of the world’s seaborne oil supply normally passes through the Strait of Hormuz, which is now nearly paralyzed. Higher airfares, shipping costs, and broader supply-chain risks will compound inflationary pressures if the conflict persists.

Ziad Daoud and Dina Esfandiary of Bloomberg Economics noted that major oil importers such as Europe and India would face significant headwinds if oil prices remain elevated, while exporters like Russia, Canada, and Norway would benefit. For the U.S., consumers would bear the brunt of higher fuel costs, but the overall economic drag would be relatively mild thanks to shale oil making the U.S. a net oil exporter.

Many market participants believe this conflict may mark the start of a deeper structural shift, not just a short-term risk event.

Monica Defend, head of the Amundi Investment Institute (Allianz Group), wrote in a report:

> The Iran crisis reinforces the structural shift we have long emphasized: geopolitics is reemerging as a cyclical macro driver. Energy volatility, inflation uncertainty, and regional fragmentation are once again becoming defining features of markets.

El-Erian also pointed out that the U.S. government bond market has clearly prioritized inflation concerns, with the conflict’s ultimate impact determined by its duration and spread. Whether bond markets can stabilize remains largely an unknown, dependent on developments on the battlefield.

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