The bond market has collapsed! Iran conflict reignited inflation fears, and global bond indices have fallen the most since May last year.

The Middle East conflict reignites, and the traditional safe-haven logic of the bond market is breaking down. Inflation concerns are once again dominating global fixed income markets, with government bonds widely sold off from Sydney to Tokyo.

U.S., Japan, Australia, New Zealand, South Korea, and Indonesia government bonds all posted losses this week. The Bloomberg Global Bond Index fell 0.8% in a single day on Monday, the largest one-day decline since May last year. The yield on the 10-year U.S. Treasury surged 10 basis points on Monday, while the 10-year Australian government bond yield jumped up to 12 basis points to 4.75% on Tuesday, and the Japanese 10-year government bond yield rose 6 basis points on Tuesday.

According to CCTV News, on Monday, March 2, local time, Trump stated that the "big wave" of strikes against Iran has not yet begun, and the operation may last four or five weeks. He said preparations are in place for a duration far exceeding this period. The U.S. Defense Secretary also stated that no ground troops have been deployed inside Iran, and no action can be ruled out.

Mohamed El-Erian, former CEO of Pacific Investment Management Company, warned that amid rising geopolitical risks, a new wave of "stagflation" is sweeping the global economy, with the ultimate impact depending on the duration and spread of the conflict. Several market participants warned that this situation could trigger a sustained sell-off in global bond markets.

Energy shocks push yields higher, and expectations of easing are being re-priced

This round of bond sell-off has overturned the usual market logic. Typically, geopolitical crises tend to drive funds into safe-haven assets like government bonds, lowering yields. But the energy price increase expectations triggered by the Iran conflict are breaking this traditional pattern.

Gareth Berry, strategist at Macquarie Bank, pointed out:

Contrary to common perception, the energy supply risk shocks from the Middle East usually push up global bond yields rather than lower them. At this point, the expectations of monetary easing have already been priced in, and these expectations now suddenly seem hard to realize. This effect is particularly pronounced.

Bloomberg market strategist Mark Cranfield also said:

The overnight signals from the U.S. Treasury market are somewhat negative, and for Asia-Pacific fixed income markets, it will be a worse day. Additionally, if the Japanese 10-year government bond auction results are weak, it could trigger broader bond sell-offs.

For investors, the uncertainty about the duration and spread of the conflict has pushed inflation concerns back to the forefront, continuously eroding the safe-haven appeal of sovereign bonds during geopolitical tensions.

Geopolitics Returns to the Macro Stage: Structural Changes May Have Begun

The main source of inflation threat is rising oil and gas prices—about one-fifth of global seaborne oil supplies typically transit through the Strait of Hormuz, which is currently nearly shut down. Moreover, higher ticket prices, transportation costs, and broader supply chain risks, if the conflict persists, will add to inflationary pressures.

Ziad Daoud and Dina Esfandiary of Bloomberg Economics noted that if oil prices remain high, major oil-importing countries like Europe and India will face significant impacts, while exporters such as Russia, Canada, and Norway will benefit. For the U.S., consumers will be pressured by rising fuel costs, but since shale oil makes the U.S. an oil exporter, the overall economic drag is relatively limited.

Many market participants believe this conflict could mark the beginning of a deeper structural shift rather than just a short-term risk event.

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

The Iran crisis has reinforced the structural shift we have been emphasizing: geopolitics is re-emerging as a cyclical macro driver. Energy volatility, inflation uncertainty, and regional divergence are becoming decisive features of the markets again.

Mohamed El-Erian also pointed out that the U.S. government bond market has clearly prioritized inflation concerns, and the ultimate impact of the conflict will depend on its duration and spread. Whether the bond market can stabilize largely remains an uncertain factor tied to the battlefield developments.

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