Global bonds rally as investors shift focus to slowdown fears

Yesterday 15:45

By: Dakir Madiha

Global bonds rally as investors shift focus to slowdown fears

Sovereign bonds rallied sharply in the United States, Australia, and Japan on Sunday as investors pivoted away from inflation concerns toward fears that the Middle East conflict could drag the global economy into a prolonged slowdown, marking a notable reversal for a market that had faced heavy selling pressure for most of March.

U.S. Treasuries, along with Australian and Japanese government bonds, advanced during Asian trading as speculation mounted that rising oil prices could trigger a global fuel crisis, according to Bloomberg. The rebound marked a shift in tone for bond markets, which had been battered for weeks as surging energy costs fueled inflation expectations and pushed yields higher across developed economies.

Gareth Berry, strategist at Macquarie Group, said market participants are now imagining what the world could look like in a month if the Middle East conflict remains unresolved, drawing parallels to the Covid period when economies risked grinding to a halt, this time due to fuel shortages rather than a health emergency.

The reversal came after a bruising month for bond holders. The yield on the 10-year U.S. Treasury had climbed roughly half a percentage point since the war began, hitting an eight-month high earlier in the week, according to Euronews. A Wall Street Journal report noted the selloff had been the worst since the tariff-driven chaos of April 2025, with hedge funds forced to unwind leveraged positions and few investors willing to step in as buyers.

Currency markets reflected similar growth concerns. The Australian dollar fell 0.3% and was on track for a monthly decline of 3.8%, its steepest drop since December 2024, according to Reuters. The New Zealand dollar slipped 0.4%, extending its March losses to 4.4%. Both currencies are widely viewed as proxies for global growth sentiment, given their countries' reliance on commodity exports and Asian demand. Australia's S&P/ASX 200 index also retreated Monday, weighed by inflation worries, and was down roughly 8% for the month, its worst performance since June 2022.

The bond market remains caught between conflicting forces. RSM chief economist Joseph Brusuelas warned last week that Treasury volatility had reached levels consistent with past episodes of price instability and policy dysfunction, with the risk of spillover into credit and equity markets. Federal Reserve Chair Jerome Powell suggested at a March 18 press conference that officials could not entirely dismiss the inflationary impact of an energy supply shock.

Yet some investors are positioning for an eventual bond recovery. Capital Group fixed income portfolio manager Ritchie Tuazon told the Wall Street Journal that a prolonged conflict would ultimately weaken global growth enough to support Treasuries, even if the short-term reaction to escalation continues to be a selloff.