By Martin Baccardax
Global bond markets extended one of their biggest selloffs in a year on Friday, taking benchmark Treasury bonds sharply higher and weighing on stocks in markets around the world, with investors ripping up bets on central bank interest rate cuts as war in the Middle East shows no signs of ending.
Fixed income investors have been wary of renewed inflation pressures since the second half of last year, as new tariffs took hold in the autumn, and the likelihood of U.S. military action in the Gulf region developed in early December.
The spike in oil prices stemming from the first wave of attacks on Iran in late February has lifted Brent crude prices by more than 50%, but have added to a long run of gains that have lifted the global pricing benchmark more than 77% since the start of the year.
That is expected to feed into headline inflation pressures over the coming months, and has triggered cautious commentary from major central banks around the world, including the Federal Reserve, on the prospect of near-term rate hikes to tame it.
"The possibility, rather, that our next move might be an increase did come up at the meeting, as it did at the last meeting," Federal Reserve Chair Jerome Powell told reporters in Washington on Wednesday after the central bank left its benchmark lending rate unchanged at between 3.5% and 3.75%.
"The vast majority of participants don't see that as their base case and, of course, we don't take things off the table," he added.
Rate traders are now pricing in a higher chance of a Fed rate hike this year than they are a rate cut, according to the CME Group's FedWatch tracker, with the highest odds of 36% penciled in for the central bank's October meeting.
Bank of America economists, led by Aditya Bhave, think the Fed will need three conditions to develop to justify a rate hike: "a stable labor market (with an unemployment rate greater than 4.5%), further increases in core inflation (with the core PCE price index rising past 3.2%) and Jerome Powell as Chairman."
The latter is plausible if the Senate is unable to confirm his intended successor, Kevin Warsh, before Powell's slated departure in May.
Bond markets are reacting in kind to both the new reality of a hawkish Fed, as well as rate hike signals from the Bank of England and the European Central Bank earlier this week.
Benchmark two-year Treasury note yields, the most-sensitive to changes in interest rate forecasts, have risen nearly 50 basis points since the start of the war and were last marked at 3.863%. The paper hit a multiyear high of 3.921% earlier in the session.
Longer-dated 10-year note yields, meanwhile, passed the 4.3% mark for the first time since last July in early Friday trading, and were last changing hands at 4.298%.
In Britain, 10-year Gilt yields traded as the highest levels since 2008 on Friday, extending a 50 basis point surge over the past two sessions, following hawkish rate signals from the Bank of England.
Germany's 10-year bund yield, a proxy for risk-free interest rates in the euro zone, traded at 3.083%, the highest since 2007.
Fixed income investors fear inflation because it erodes the present value of future coupon and principal payments. So as interest rates rise, bond prices fall.
The same mechanics are largely at work in the stock market, as well, where a higher "risk free" rate, which is used to price the present value of future company profits, pushes equity prices lower.
The S&P 500 was last trading 55 points lower on the session at 6550 points in late Friday dealing, having slipped to the lowest levels since mid-November.
The benchmark is also trading below its 200-day moving average, a key indicator for future returns tracked by technical analysts, for the first time in more than a year.
"I don't think anyone is factoring in a long term, sustained dragged out inflationary battle, but Iran creates these pockets of uncertainty that make it very difficult to deploy into risk assets when you don't know what's next," said Cullen Rogers, chief investment officer at Wedbush Fund Advisers.
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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March 20, 2026 13:34 ET (17:34 GMT)
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