Global bonds surged Wednesday on news that the US and Iran had agreed to a ceasefire, pausing a war that roiled markets for weeks by delivering the worst oil shock in years.
European debt, at the heart of the selloff due to the region’s exposure to soaring energy prices, led the gains with some yields falling more than 25 basis points as traders slashed wagers on interest-rate hikes. As part of the two-week truce, Tehran agreed to reopen the Strait of Hormuz, a crucial transit route for oil and gas shipments. Crude prices plunged.
US Treasuries also rose as swaps put the chance of a Federal Reserve rate cut this year at almost 50%, up from near zero at the start of this week. The 10-year benchmark yield fell five basis points to 4.25%, the lowest since mid-March.
“You can take out more hikes from the European central banks,” Myles Bradshaw, head of global aggregate strategies at JPMorgan Asset Management, said on Bloomberg TV. “The inflation shock is relatively small and what’s uncertain is the growth shock,” he added, saying the economy was in a more vulnerable position than when Russia invaded Ukraine in 2022. “I think in that world, central banks will err on the side of caution.”
Markets had been pricing stable or falling rates in Europe before the war stoked concerns that inflation would accelerate globally. Since the US launched strikes against Iran on Feb. 28, yields in Europe soared to multi-year highs and gauges of market volatility posted a record surge. US Treasuries also sold off sharply, leading Treasuries to post their biggest monthly loss since October 2024 in March.
Inflation expectations fell sharply Wednesday, spurring the bid in bonds. A proxy for euro area price growth over the next 10 years dropped to 2.1%, almost fully erasing the sharp jump since the start of the war. Swaps now imply around a 30% chance that the ECB will hike rates by a quarter-point later this month, down from 70% on Tuesday.
“If the ceasefire gets extended, an ECB rate hike in April, and beyond, becomes unlikely,” said Christoph Rieger, head of fixed income and credit research at Commerzbank AG.
Risks Remain
Oil fell the most in almost six years after Trump announced the truce, which came roughly 90 minutes before his deadline for Iran to reopen the strait or face a massive military bombardment.
But while falling energy costs should ease the pressure on policymakers to act to keep inflation in check, some investors say it is too soon to sound the all-clear.
“A lot of negotiation needs to take place before we can say this is over,” said Matthew Amis, an investment manager at Aberdeen. “Markets are going to be even more sensitive to headline risk over the next two weeks, therefore this doesn’t feel like a one way move in yields just yet.”
What Bloomberg Strategists Say:
“The drop in yields and rise in stocks since last night’s ceasefire announcement has taken the Trump Reversal Index back to not much higher than its prewar level. Stocks are less than 2% below where they were on the war’s eve, while yields have retraced almost 50% of their move.”
— Simon White, macro strategist, London. Click here to read the full analysis.
Gulf nations continued to report attacks on Wednesday, and it’s not yet clear under what terms ships can pass through the Strait of Hormuz. Meanwhile, the Israeli army also halted attacks against Iran, but it remains on high alert to respond to any violation of the ceasefire, an IDF spokesperson said on X.
“I really do think both sides are looking for an offramp but I’m not sure we’re 100% there yet,” said Win Thin, chief economist at Bank of Nassau 1982. “It feels like markets want to unwind the war trade,” adding that US 10-year yields could “quickly” fall to 4%.
At the depth of the rout last month, swaps implied four interest rate hikes from the European Central Bank and Bank of England this year, with the first expected as early as this month. By Wednesday, the expectations had dwindled to just two quarter-point increases from the ECB and one from the BOE later this year.
German 10-year bond yields slumped 15 basis points to 2.94%, while the equivalent UK rate was about 20 basis points lower at 4.70%.
If the ceasefire holds, the next challenge for investors will be to assess the extent of damage to energy infrastructure and the knock-on impact for energy prices in the coming months. Much will now depend on how quickly transit through Hormuz can resume.
“Central banks will be heaving a sigh of relief because where they stand today they are in reasonably good shape, they can have some time to assess data,” said Guy Miller, chief market strategist at Zurich. “But there will be a pass through from oil, and inflation will be higher for longer.”
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