By Tom Westbrook and Ankur Banerjee
SINGAPORE, April 8 (Reuters) – Global bond markets may rebound but are unlikely to fully recover from the war-driven selloff because, even if there is peace, energy prices and inflation will run hotter for longer.
The U.S. and Iran appeared to have negotiated a ceasefire late on Tuesday, with President Donald Trump announcing a two-week pause in attacks, conditional on the reopening of the Strait of Hormuz and Iran promising ships safe passage.
That set oil prices tumbling and stocks and bonds rallying.[MKTS/GLOB]
However, pre-war wagers for interest rate cuts this year in places such as the U.S., Britain and oil-rich Norway have gone and won’t return, investors say. Some argue the ceasefire may even tilt risk towards higher rates, as the likelihood has lessened of severe oil shortages slowing global growth.
The energy shock has thrown inflation into sharp relief, highlighting how major economies have not managed to get inflation back to target for years, analysts say.
The result has been a reckoning for bond investors. The FTSE World Government Bond Index slid more than 3% in March, its sharpest monthly drop in 1 1/2 years.
“Sometimes these events, even when unwound, have changed the psyche of what the likely next move is for most central banks,” said Andrew Lilley, chief rates strategist at Barrenjoey, a Sydney-based investment bank.
“This temporary oil price shock has brought investors closer to the truth, which is that actually inflation has been persistently high for the last three years.”
Uncertainty still looms over energy security, with real-world oil prices – which hit record highs this week – staying elevated amid tight supply. More than two-thirds of central banks see geopolitics as the top risk, according to a new survey by Central Banking Publications.
On Wednesday, policymakers in India and New Zealand left key policy rates unchanged, at 5.25% and 2.25% respectively, but laid the groundwork for their next moves to be hikes.
“The balance of risks has shifted, and there are likely to be differences between the near term and medium term,” the RBNZ said in a statement explaining its decision.
“Any signs of significant second-round inflationary effects or increases in medium-term inflation expectations would require decisive and timely increases in the OCR to re-anchor inflation expectations.”
HIGHER FOR LONGER
Broad markets were ebullient about the ceasefire, with stocks surging, the safe-haven dollar sinking and Brent crude futures below $100 a barrel for the first time in two weeks.
Treasuries and bond markets in Europe, Britain and Australia also rallied strongly. However, yields only fell back to mid-March levels, with benchmark 10-year Treasury yields at 4.85% and two-year yields at 3.72% – broadly in line with the current Fed funds rate.
Analysts who say stocks can rally further if peace prevails at the same time expect short-end yields to struggle to get much lower as policymakers lack the room to cut rates.
Fed funds futures, which at the start of the year had priced in two U.S. rate cuts for 2026, imply a barely 50% chance of a single cut.
“Central banks will be on high alert that this supply shock does not feed into higher inflation expectations,” said Prashant Newnaha, senior rates strategist at TD Securities in Singapore.
“Rate cuts should be off the table.”
The path to higher rates also looks clearer in Japan, with the ceasefire easing some of the worries over the supply of Gulf energy, on which the East Asian economy depends.
“The BOJ was totally willing to raise rates without this Middle East uncertainty. And now this ceasefire will give a good reason for them to go ahead and raise rates in April,” said Naka Matsuzawa, chief strategist at Nomura Securities in Tokyo.
“All the other conditions, including wages and inflation, were all met already.”
Even for China, which has long struggled with deflation, global investment banks are removing earlier calls for rate cuts this year.
To be sure, there is room for bonds to rally, particularly because selling was so heavy in March and positioning was aggressive in implying a series of rate hikes in Europe and Britain.
However, with the ceasefire reducing the risk of a global recession, policymakers are leaning away from rate cuts, preferring a mostly wait-and-see stance.
As India’s central bank Governor Sanjay Malhotra put it on Wednesday, “Risks are on the upside.”
(Reporting by Tom Westbrook and Ankur Banerjee in Singapore; Editing by Kevin Buckland)
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