Global bond sell-off deepens as oil spike stokes stagflation fear

SINGAPORE - Global bond markets tumbled in Asian trading on March 9 as an oil price shock prompted investors to price in higher inflation and a deteriorating economic growth outlook.

Yields on benchmark 10-year US Treasuries rose more than seven basis points – the most since January – with pressure rippling through other sovereign debt markets. Australia’s policy-sensitive three-year yield climbed to its highest level since 2011, while German bund futures slid to an almost 15-year low. 

Treasuries later pared some losses, and the Bloomberg Dollar Spot Index trimmed gains after the Financial Times reported that Group of Seven finance ministers would discuss a possible joint release of oil reserves with the International Energy Agency.

Still, the broader bond rout reflects anxiety about the global economy after crude oil surged towards US$120 a barrel, up almost 80 per cent since the Iran war began and disrupted shipments from the Middle East. Sustained price increases could force central banks to keep policy tight to curb inflation even as growth slows, leaving the world grappling with stagflation.

Inflation fears have led traders to scale back expectations for the US Federal Reserve’s next quarter-point rate cut to September. At the end of February, before the war erupted, traders had fully priced in a move by July. Some bond options traders are now betting the Fed may not cut rates at all in 2026. 

“A week-long halt in Hormuz shipping is driving a fast-escalating energy shock, lifting oil and gas prices, boosting the US dollar and global yields, and challenging 2026 consensus trades as stagflation risks rise,” OCBC Bank strategists including Mr Sim Moh Siong wrote in a note.

The economic toll would be significant. A 10 per cent rise in energy costs that persists for a year would lift global inflation by about 0.4 percentage point and shave up to 0.2 percentage point off growth, according to the International Monetary Fund. Bloomberg Intelligence says demand destruction tends to set in when crude hits US$133, highlighting the risks if prices continue to climb.

Supply strain

Investors have braced themselves for a prolonged conflict, suggesting the oil spike may not be short-lived. Iran’s selection of the late Ayatollah Ali Khamenei’s son as the next supreme leader signals continuity in Tehran’s stance and little shift in its approach to the war. Meanwhile, output cuts in Kuwait and the United Arab Emirates highlight the growing supply strain after the closure of Hormuz.

In the US, recent data has added to concerns about a potential stagflationary mix. Employers unexpectedly cut jobs in February and the unemployment rate rose, pointing to cracks in the labour market just as price pressures intensify.

“Oil is arguably the single most important input into global inflation,” said Mr Tim Murray, a capital market strategist in the Multi-Asset Division at T. Rowe Price. With most Asian economies significant net oil importers, that creates a “relative headwind for the region in a risk-off environment”, he added.

Bonds fell across Asia, with benchmark yields climbing by double-digit figures in Australia, New Zealand and South Korea. Indonesian and Japanese debt markets also slumped, with the 10-year yen government yields surging by 11.5 basis points, while European bond futures retreated.

Chinese government bonds declined as well, with 30-year bond futures posting their biggest drop of the year. The asset had initially outperformed global peers after the Iran war began, but confidence in its resilience is being eroded by fears of imported inflation as oil prices push higher. BLOOMBERG