Bond markets are raising alarms over persistent inflationary pressures, driven in part by geopolitical tensions and soaring energy costs. Brent crude, the global oil benchmark, climbed more than 1% on Thursday to $96.64, marking a one-month high, while U.S. West Texas Intermediate rose 1.6% to $92.52 per barrel.
Padhraic Garvey, ING’s regional head of research for the Americas and head of global rates and debt strategy, warned that the conflict involving Iran and elevated energy prices are creating upward pressure on longer-dated yields. He noted that these dynamics present particular challenges for Europe and Asia, saying, “This is especially a live problem for Europe to deal with, and for Asia, and indeed beyond.”
Garvey cautioned that while long-end yields might appear fairly priced if current market turbulence were to cease, the ongoing pressure is unlikely to vanish. “If the music stopped now, the absolute level of long-end yields for many issuers looks reasonably fair. The problem is the music is still blaring,” he wrote in a Thursday note. “It’s tough to see the pressure for higher long-end yields magically dissipate.”
He added that while the situation may not escalate into a crisis, it could become one if yields are pushed too far. Meanwhile, market expectations for a 25-basis-point interest rate hike at the September Federal Open Market Committee meeting have shifted significantly, moving from an even 50-50 probability to a 3-to-1 advantage in favor of a rate increase.
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