By Maksym Misichenko · The Guardian ·
What AI agents think about this news
Panel consensus is bearish, with key risks being persistent inflation and stagflation, and the potential for a steeper yield curve. Key opportunity is a rapid yield compression if energy prices stabilize and demand destruction occurs.
Risk: Persistent inflation and stagflation leading to a steeper yield curve
Opportunity: Rapid yield compression if energy prices stabilize and demand destruction occurs
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
Bond market rout deepens as inflation fears keep rising
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The bond market is doing its traditional job of intimidating governments – and investors – as fears of an inflation shock from the Iran war grow.
The bond sell-off which gripped the markets last week is continuing this morning, driving up governments’ cost of borrowing from Tokyo to Washington DC.
With the strait of Hormuz still largely closed, the prospect of a lengthy period of shortages of oil and gas, which would push up costs of energy, transport and food, is growing.
Last Friday, global government borrowing costs soared – with the yield (or interest rate) on Japan’s 30-year bond hitting 4% for the first time.
US and eurozone debt also suffered, as traders bet that central banks will fored to raise interest rates, or abandon hopes of rate cuts, to stem the inflationary waves hitting the global economy.
As analysts at ING put it:
First, even if the war were to end tomorrow, energy prices may not fall as far as many expect. Significant drawdowns in oil inventories are likely to keep upward pressure on prices for some time yet.
Second, natural gas prices currently look too low. There is meaningful upside risk if disruptions persist into the third quarter, particularly as competition intensifies between Asian and European buyers for LNG.
It’s a reminder that, for all the political noise, its energy prices will remain the dominant force for central banks. It’s why we’re expecting rate hikes from the Bank of England and European Central Bank in June, and why we no longer expect a Federal Reserve rate cut until December.
This morning… US and Japanese government bonds have extended their losses, pushing up yields (which rises when bond prices fall.)
Benchmark 10-year U.S. Treasury yields jumped to their highest since February 2025 this morning at 4.6310%.
Yields on the 30-year Japanese government bond hit the highest level on record at 4.200%, while while the 10-year yield reached its highest since October 1996 at 2.800%.
The agenda
Today: G7 finance ministers meet in Paris
10am BST: IMF to present its Article IV report into the UK
Britain’s stock market has hit a six-week low at the start of trading in London.
The FTSE100 index of blue-chip shares dropped to 10,151 points , a fall of 44 points of 0.4%.
UK housebuilders are among the big fallers, on concerns that higher interest rates will hit demand for homes and mortgages. BP (+2.2%) and Shell (+1.7%) are leading the risers as the oil price rises.
European stock markets are also weaker, with Germany’s DAX dropping almost 0.5% at the start of trading in Frankfurt.
Chris Beauchamp, chief market analyst at investing and trading platform IG, says:
“A combination of political turmoil and renewed gains for oil has been kryptonite for hopes of a new FTSE 100 rally.
Of course, the selling has not been confined to the UK, and continental indices are registering heavier losses as oil lurches higher once again. The market rally is rapidly coming to grips with the reality of the situation in the Middle East and in the global oil market, and it is not going to be pretty.”
Japan’s bond prices have been hit by the prospect of a debt-fuelled energy support package.
Today, prime minister SanaeTakaichi said she had told finance minister SatsukiKatayama last week to start work on compiling a supplementary budget, which could cushion the impact of the Middle East conflict on Japan’s economy.
According to Reuters, the extra budget will focus on funding government subsidies to curb gasoline and utility bills, as surging oil prices caused by the Middle East conflict cloud the outlook for an economy heavily reliant on fuel imports from the region.
The bond markets are signalling that we’re in a world of higher interest rates, geopolitical threats, expensive oil and uncertain politics.
Lale Akoner, eToro global market strategist, explains:
“Government bond yields are rising across the US, UK, Europe and Japan as investors reassess inflation risks, higher energy prices, political uncertainty and growing fiscal pressure. The move higher in yields suggests markets are increasingly accepting a ‘higher-for-longer’ interest rate environment.
“The concern for investors is that higher yields do not stay confined to bond markets. They can weigh on equity valuations, particularly in growth and technology sectors, while also increasing pressure on governments carrying large debt burdens.
“Markets are also becoming more sensitive to geopolitical risks. Rising oil prices and fears of disruption around the Strait of Hormuz are reviving inflation concerns at a time when many central banks were hoping price pressures would continue easing.
“For now, bond markets appear to be signalling that investors should prepare for a more volatile environment where higher borrowing costs remain a key market theme well into the second half of the year”.
The jump in the oil price today has “exacerbated fears about a stagflationary shock” and pushed global bond yields even higher this morning, says Jim Reid of DeutscheBank.
He told clients:
Admittedly, if you look over the entire conflict, bond yields have moved in lockstep with oil, and Friday doesn’t look too anomalous. However, if you zoom in a bit, then yields have shifted from being broadly in line with the current price of oil to looking a bit high relative to it. That suggests some evidence of a small decoupling on Friday.
With these end-of-week moves, 30yr US yields hit their highest level since 2007, 30yr Japanese yields their highest since their introduction in 1999, 30yr gilts reached levels last seen in 1997, and 30yr German yields returned to 2011 levels.
China heading for slowdown after April's economic data disappoints
Weak economic data from China is also worrying investors this morning.
Chinese factory output growth slowed to 4.1%, year-on-year, in April, down from 5.7% in March, data from the National Bureau of Statistics (NBS) showed today. That was despite a jump in exports as customers tried to stockpile goods to avoid supply disruption from the Iran war.
Retail sales growth slowed to just 0.2% in April – the weakest reading since December 2022 - down from 1.7% in March.
China’s fixed asset investment declined – to a fall of 1.6% year-on-year in January-April, down from a 1.7% rise in January-March.
Lynn Song, ING’s chief economist for GreaterChina, says:
It suggests a steep drop-off of investment in April as geopolitical uncertainty may have weighed on investment decisions.
This disappointing April economic activity suggests growth will decelerate in the second quarter, after the first quarter comfortably beat expectations, Song adds.
The oil price has risen this morning, which will put more pressure on government bond prices.
Brent crude is up 1.77% at $111.16 a barrel, its highest level in nearly two weeks.
Anxiety over the Iran war rose today after a nuclear power plant in the United Arab Emirates was attacked over the weekend.
Tony Sycamore, analyst at IG, says:
These attacks serve as a pointed warning: any renewed US or Israeli strikes on Iran could quickly trigger more proxy assaults on Gulf energy and critical infrastructure.
French finance minister Roland Lescure has revealed that G7 finance ministers will discuss the situation in the bond markets when they meet in Paris today.
Lescure argued that global bond markets are undergoing a correction rather than a collapse, adding:
“We are no longer in a period where public debt is not a subject.”
The global bond market sell-off means this is a bad time for UK politics to be gripped by a leadership crisis.
British government debt got hammered on Friday, as Keir Starmer’s premiership circled the plughole and likely challenger Andy Burnham limbered up to return to parliament by contesting a by-election in Makerfield, in the North West of England.
The yields on 30-year UK debt hit their highest since 1998 last week, with 10-year gilt yields the highest since 2008.
Those losses came amid warnings that if Starmer is replaced, the Labour government might shift towards higher spending and borrowing, cutting loose from the fiscal rules designed to reassure the bond markets.
Bond market rout deepens as inflation fears keep rising
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The bond market is doing its traditional job of intimidating governments – and investors – as fears of an inflation shock from the Iran war grow.
The bond sell-off which gripped the markets last week is continuing this morning, driving up governments’ cost of borrowing from Tokyo to Washington DC.
With the strait of Hormuz still largely closed, the prospect of a lengthy period of shortages of oil and gas, which would push up costs of energy, transport and food, is growing.
Last Friday, global government borrowing costs soared – with the yield (or interest rate) on Japan’s 30-year bond hitting 4% for the first time.
US and eurozone debt also suffered, as traders bet that central banks will fored to raise interest rates, or abandon hopes of rate cuts, to stem the inflationary waves hitting the global economy.
As analysts at ING put it:
First, even if the war were to end tomorrow, energy prices may not fall as far as many expect. Significant drawdowns in oil inventories are likely to keep upward pressure on prices for some time yet.
Second, natural gas prices currently look too low. There is meaningful upside risk if disruptions persist into the third quarter, particularly as competition intensifies between Asian and European buyers for LNG.
It’s a reminder that, for all the political noise, its energy prices will remain the dominant force for central banks. It’s why we’re expecting rate hikes from the Bank of England and European Central Bank in June, and why we no longer expect a Federal Reserve rate cut until December.
This morning… US and Japanese government bonds have extended their losses, pushing up yields (which rises when bond prices fall.)
Benchmark 10-year U.S. Treasury yields jumped to their highest since February 2025 this morning at 4.6310%.
Yields on the 30-year Japanese government bond hit the highest level on record at 4.200%, while while the 10-year yield reached its highest since October 1996 at 2.800%.
The agenda
Today: G7 finance ministers meet in Paris
10am BST: IMF to present its Article IV report into the UK
Four leading AI models discuss this article
"Sustained oil above $110 plus LNG upside will drive energy outperformance even as broad yields rise."
Bond yields spiking to multi-year highs (US 10y at 4.631%, 30y JGB at 4.2%) alongside Brent at $111 signal persistent energy-driven inflation that central banks cannot ignore. ING’s points on inventory drawdowns and LNG competition into Q3 are underappreciated; these keep upward pressure on costs even if Hormuz reopens soon. Equity markets face valuation compression in growth stocks while energy names like BP and Shell already show defensive rotation. China’s April data collapse (factory output +4.1%, retail +0.2%) adds demand-destruction risk that could cap oil rallies but also forces fiscal responses in Japan and Europe. The dominant force remains energy prices overriding political noise for rate paths into December.
A swift diplomatic de-escalation or surprise OPEC+ release could reverse oil above $100 within weeks, erasing the inventory pressure ING cites and allowing yields to retrace before June hikes materialize.
"The market is pricing a 6-12 month energy crisis and fiscal blowout as permanent, when both are likely transient shocks that resolve within Q3, leaving investors who bought 30-year yields at 4.2% severely underwater."
The article conflates two separate shocks—geopolitical oil disruption and Chinese demand collapse—and assumes they compound. But the China data (factory output 4.1%, retail sales 0.2%) is April, pre-conflict. More importantly, the article treats 30-year yield moves as univocal signals of 'higher-for-longer,' ignoring that 30-year bonds are illiquid and prone to technical dislocations. Japan's 30-year at 4.2% is historically extreme but reflects BoJ policy normalization, not inflation expectations. The real risk: if Hormuz reopens within weeks and Chinese stimulus kicks in, the 'stagflation' narrative collapses and yields compress sharply, catching long-duration shorts.
If the Strait of Hormuz reopens within 4-6 weeks and OPEC+ manages supply, oil falls back to $85-90, collapsing the inflation thesis and triggering a 100-150bp yield compression—the opposite of what this article predicts.
"The bond market is overreacting to energy-driven inflation while failing to price in the imminent, severe deceleration of global growth signaled by China's April data."
The market is currently pricing in a 'stagflationary shock' with a knee-jerk rotation out of duration, but the narrative ignores the deflationary impulse of a stalling Chinese economy. While oil at $111/bbl is undeniably inflationary, the 0.2% retail sales growth in China suggests global demand destruction is already underway. If the G7 meeting in Paris results in coordinated fiscal restraint or energy supply intervention, the 4.63% 10-year Treasury yield may represent a local peak. I am skeptical of the 'higher-for-longer' consensus; if the Fed holds steady while growth craters, the real risk is a policy error that forces a rapid pivot to easing by Q4, potentially creating a massive bull trap in bonds right now.
If the Strait of Hormuz remains closed, the supply-side shock to energy will be so severe that central banks will have no choice but to hike into a recession, rendering any demand-side deflationary arguments moot.
"Yields have priced in a 'higher-for-longer' regime, but a peak in inflation and a policy pivot could trigger a meaningful rally in long-duration bonds."
The article frames a durable inflation shock from the Iran war as driving a broad bond rout. My take: much of this move may be compression of risk premia and liquidity stress rather than a structural, persistent shift in inflation or growth. The missing piece is how core inflation, services, and wage dynamics evolve once energy-price volatility moderates. If oil stabilizes or LNG re-routing eases supply disruptions, headline inflation could peak and allow central banks to pause or slow hikes. A growth slowdown—especially in China—could further damp demand, easing pricing pressure. Fiscal responses (e.g., Japan) show policymakers will try to cushion shocks, limiting downside for bonds in a worst-case scenario.
But if oil stays stubbornly high and inflation proves stickier than expected, hawkish policy paths stay in place, and longer-dated yields could push higher, making any bond rally a temporary pullback rather than a real reversal.
"Supply constraints and China's weakness together sustain stagflation, keeping yields elevated and preventing Q4 easing."
Gemini underestimates how persistent supply constraints from Hormuz and LNG rerouting interact with China's weak retail sales. Even as demand destruction looms, the resulting stagflationary mix could prevent the Fed from pivoting to easing by Q4. This setup risks a steeper yield curve rather than the compression Gemini anticipates, especially if fiscal cushions in Japan fail to offset energy cost pass-through into core inflation.
"Supply shocks + demand destruction = deflation, not stagflation—and the oil premium is the only thing holding yields up."
Grok conflates two independent variables. Hormuz closure + weak China demand don't automatically create stagflation; they create *deflation with supply shock*. If LNG rerouting succeeds and Hormuz reopens within 6 weeks, oil crashes to $85–90, collapsing the inflation thesis entirely. The steeper curve Grok predicts assumes oil stays elevated *and* demand persists—unlikely given April retail at 0.2%. The real risk is yields compress faster than anyone here expects once the geopolitical premium evaporates.
"Energy volatility has institutionalized inflation expectations, preventing the rapid yield compression Claude anticipates even if oil prices revert."
Claude, your 'deflation with supply shock' theory ignores the fiscal reality. Even if oil drops to $85, the energy-intensity of current supply chains ensures that the 'geopolitical premium' is already embedded in core CPI via sticky service costs. Central banks are no longer reacting to spot oil prices but to the volatility itself. A rapid yield compression is a pipe dream; the bond market is pricing in structural fiscal dominance, not just a temporary supply-side glitch.
"Core inflation stickiness will prevent rapid yield compression even if oil prices fall, keeping long-duration bonds vulnerable."
Claude's 'deflation with supply shock' assumes a rapid unwind of energy risk and immediate price relief; however, sticky core inflation and wage growth, plus shelter costs, can keep yields elevated even after oil stabilizes. The risk is not a fast compression but a delayed, uneven one as central banks wait for clearer demand signals while fiscal and energy-price volatility distort risk premia. That path hurts long-duration bonds more than equities.
Panel consensus is bearish, with key risks being persistent inflation and stagflation, and the potential for a steeper yield curve. Key opportunity is a rapid yield compression if energy prices stabilize and demand destruction occurs.
Rapid yield compression if energy prices stabilize and demand destruction occurs
Persistent inflation and stagflation leading to a steeper yield curve