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Global bond markets slump as Iran-US war, record oil prices and surging US Treasury yields spur inflation fears, foreign selling of Treasuries, and a shift into booming US equities
Bond market is witnessing sharp selloff following Iran-US war
The global bond market is under pressure amid the geopolitical turmoil triggered by the Iran-US war, leading to a spike in sell-off. Bondholders across the globe are worried over the fear of inflation, elevated crude oil prices, and a looming energy crisis.
Seven of the top 10 foreign holders of US Treasuries — including Japan, Belgium, Canada, and France — reduced their holdings of US government debt during the month.
Experts underline the growing concerns of inflation, energy prices and fiscal pressure as a major factor behind the reductions in Treasury holdings.
What Are The Reasons Behind Sharp Sell-Off?
1. Elevated Crude Oil Prices And Energy Crisis
The closure of the Strait of Hormuz following the Iran-US war has wreaked havoc across the globe, creating a global energy crisis. Crude oil prices have jumped to a record level to $110 per barrel. Fears are arising among investors that inflation will spike in the near future, leading investors to huddle towards inflation-protected assets.
2. US Treasury Yield At Record High
The 10-year US treasury yield has reached a record high of 4.16 per cent, while the 30-year bond is offering a yield of 5.14.
A higher yield in the bond market indicates that inflation is looming. It also raises the possibility that the Fed will hesitate to make further rate cuts in the coming months.
Higher inflation hurts the existing investors as it leads to a reduction in the real value of future interest payments. So, investors would demand higher yields, while the existing bond price would fall.
Many old government bonds lost value globally over the past few years.
3. Equity Market In US Booming
Global investors are now preferring equities rather than long-term bonds, as markets of US, Japan, Taiwan and South Korea have seen a sharp jump in inflows.
April remained a remarkable month for US market, with Nasdaq, S&P 500 and Dow Jones climbing to more than 15 per cent, 10 per cent and 7 per cent, respectively. Tech-focused Nasdaq has crossed 25,000 mark for the first time amid the rally.
4. Geopolitical Turmoil And Uncertainty
Geopolitical uncertainty and wars have raised fears among investors, as traders are looking to diversify their investments rather than focusing on one kind of asset. China has sharply reduced US Treasury holdings over time, while Japan has also trimmed exposure recently.
Higher US bond yields drive up the dollar and reduce the appeal of emerging-market assets, fueling capital outflows from Asia.
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