Download App

[Bond Market Unlikely to Return to Pre-War Levels; Energy Shock Reshapes Inflation Expectations; Rate Cut Bets Faded] ⑴ Global bond markets may rebound, but are unlikely to fully recover the losses from the war-induced sell-off, as energy prices and inflation will remain high for a longer period even with peace. ⑵ Investors say that previous bets on rate cuts this year by economies such as the US, UK, and Norway have disappeared and will not return. Some even believe that a ceasefire may actually shift the risk toward rate hikes, as the likelihood of a severe oil shortage dragging down global growth has decreased. ⑶ The energy shock has exacerbated inflation concerns, reflecting major economies' failure to bring inflation back to target levels over the years. Andrew Lilly, chief interest rate strategist at Barenjoy, points out that even if such events are resolved, they change market expectations for the next move by most central banks. ⑷ On Wednesday, both the Reserve Bank of India and the Reserve Bank of New Zealand kept their key policy rates unchanged, but laid the groundwork for further rate hikes. The Reserve Bank of New Zealand stated that any significant second-round inflation effects or signs of rising medium-term inflation expectations would require a decisive and timely increase in interest rates to re-anchor inflation expectations. (5) Regarding market pricing, federal funds futures, which initially anticipated two rate cuts in 2026, now suggest only a 50% probability of a single rate cut. Prashant Neunaha, senior interest rate strategist at TD Securities, stated that central banks will remain highly vigilant to prevent supply shocks from triggering higher inflation expectations, and rate cuts are no longer under consideration. (6) Japan's path also leans towards rate hikes. Nomura Securities chief strategist Matsuzawa stated that the Bank of Japan was already fully willing to raise rates without Middle East uncertainty, and the ceasefire provides ample justification for a rate hike in April. (7) In terms of trading psychology, the market's previous reassuring rebound from the ceasefire pushed bond yields down, but only to levels seen in mid-March. Investors are now digesting a more persistent reality: the energy cost structure has shifted upward, the threshold for central bank rate cuts has significantly increased, and the pre-war pricing benchmark in the bond market may have irreversibly changed. (8) Future focus will be on how central banks assess the effects of a second round of inflation and the evolution of the geopolitical situation after the ceasefire expires. These two factors will determine the final anchoring position of the yield curve.