High oil prices and persistent inflation mean even a ceasefire can't save the bond market! Is the dream of global interest rate cuts shattered?
2026-04-09 11:29:57
Global bond markets rebounded following news of a ceasefire between the US, Israel, and Iran, but market analysts generally believe that the bond market will struggle to fully recover to pre-war levels. Even after the conflict ends, high energy prices and inflationary pressures will persist for a long time.
The FTSE World Government Bond Index fell more than 3% in March, marking its biggest monthly drop in a year and a half. While the bond market has recovered somewhat since the ceasefire, yields have only fallen back to mid-March levels, far from pre-war lows.
The oil supply shock triggered by the disruption of the Strait of Hormuz has once again brought inflation to the forefront of market attention. The fact that major economies have struggled for years to bring the Consumer Price Index (CPI) back to its target range has become even more pronounced since the war.
Energy security uncertainties persist, real oil prices remain high, and more than two-thirds of central banks cite geopolitical risks as their primary concern .
Before the outbreak of war, the market generally bet that the United States, the United Kingdom, and oil-rich countries such as Norway would cut interest rates multiple times this year. However, the energy shock has completely changed this expectation, and the ceasefire agreement may even shift the risk to interest rate hikes .
Andrew Lilly, chief interest rate strategist at Sydney-based investment bank Barrenjoey, noted: “Sometimes, even as the effects of these events fade, they have already altered market expectations for the next move by most central banks. This temporary oil price shock has brought investors closer to the truth that inflation has actually been high for the past three years.”
Prashant Newnaha, senior interest rate strategist at TD Securities in Singapore, also said: "Central banks will be on high alert to ensure that this supply shock does not push up inflation expectations. Interest rate cuts should no longer be on the agenda."
Even if a ceasefire agreement is ultimately implemented, major central banks still face a policy dilemma: the energy shock may slow economic growth, but at the same time, it may push up inflation expectations, limiting the room for interest rate cuts. Japan's interest rate path is becoming clearer.
On Wednesday, the Reserve Bank of India and the Reserve Bank of New Zealand kept their key policy rates unchanged at 5.25% and 2.25% respectively, but paved the way for future rate hikes.
Q: Why is it difficult for the global bond market to fully rebound to pre-war levels before the Iran war?
A: The oil supply shock caused by the war has brought inflation back into focus. Even if a ceasefire agreement is reached, energy prices and inflation will remain high for a longer period. The fact that major economies have failed to bring CPI back to the target range for many years has been further highlighted by the energy shock, causing the pre-war expectation of interest rate cuts to completely disappear.
Q: What actual impact will the ceasefire agreement have on the bond market rebound?
A: The ceasefire news initially spurred a short-term rebound in the bond market, but yields only fell back to mid-March levels. Market expectations for the number of Fed rate cuts in 2026 have been significantly revised downward from two at the beginning of the year to only one (with a probability slightly above 50%), clearly limiting the rebound's strength.
Q: How will energy shocks limit the policy space of central banks?
A: Central banks around the world are highly vigilant about supply shocks pushing up inflation expectations. The Reserve Bank of India and the Reserve Bank of New Zealand have kept interest rates unchanged and are paving the way for rate hikes, while Japan's rate hike path is becoming clearer. Even with slowing economic growth, high inflation makes rate cuts unlikely, leaving policymakers with insufficient room for maneuver.
Q: How should investors adjust their bond market strategies in the current environment?
A: The bond market still has some room for rebound, but it is unlikely to return to pre-war low yield levels. Investors need to pay attention to energy price trends and central bank policy signals. In the short term, they can seize the rebound opportunities brought about by the ceasefire, but in the long term, they should prepare for interest rates to remain at a higher level for a longer period of time and avoid over-betting on aggressive interest rate cuts.
The energy shock triggered by the war with Iran has profoundly altered expectations in the global bond market. Even if a ceasefire is achieved, high oil prices and inflationary pressures will persist for a long time, making it unlikely that the pre-war bets on interest rate cuts will recur. The FTSE World Government Bond Index recorded a sharp decline in March, and the upside potential for the bond market is currently limited, with yields in major economies still far above pre-war levels .
With limited policy space available to the central bank, investors should prepare for interest rates to remain at higher levels for an extended period .
The FTSE World Government Bond Index fell more than 3% in March, marking its biggest monthly drop in a year and a half. While the bond market has recovered somewhat since the ceasefire, yields have only fallen back to mid-March levels, far from pre-war lows.
The oil shock reignites inflation concerns
The oil supply shock triggered by the disruption of the Strait of Hormuz has once again brought inflation to the forefront of market attention. The fact that major economies have struggled for years to bring the Consumer Price Index (CPI) back to its target range has become even more pronounced since the war.
Energy security uncertainties persist, real oil prices remain high, and more than two-thirds of central banks cite geopolitical risks as their primary concern .
Pre-war expectations of interest rate cuts are unlikely to reappear.
Before the outbreak of war, the market generally bet that the United States, the United Kingdom, and oil-rich countries such as Norway would cut interest rates multiple times this year. However, the energy shock has completely changed this expectation, and the ceasefire agreement may even shift the risk to interest rate hikes .
Andrew Lilly, chief interest rate strategist at Sydney-based investment bank Barrenjoey, noted: “Sometimes, even as the effects of these events fade, they have already altered market expectations for the next move by most central banks. This temporary oil price shock has brought investors closer to the truth that inflation has actually been high for the past three years.”
Prashant Newnaha, senior interest rate strategist at TD Securities in Singapore, also said: "Central banks will be on high alert to ensure that this supply shock does not push up inflation expectations. Interest rate cuts should no longer be on the agenda."
Central bank policy space is limited
Even if a ceasefire agreement is ultimately implemented, major central banks still face a policy dilemma: the energy shock may slow economic growth, but at the same time, it may push up inflation expectations, limiting the room for interest rate cuts. Japan's interest rate path is becoming clearer.
On Wednesday, the Reserve Bank of India and the Reserve Bank of New Zealand kept their key policy rates unchanged at 5.25% and 2.25% respectively, but paved the way for future rate hikes.
Frequently Asked Questions
Q: Why is it difficult for the global bond market to fully rebound to pre-war levels before the Iran war?
A: The oil supply shock caused by the war has brought inflation back into focus. Even if a ceasefire agreement is reached, energy prices and inflation will remain high for a longer period. The fact that major economies have failed to bring CPI back to the target range for many years has been further highlighted by the energy shock, causing the pre-war expectation of interest rate cuts to completely disappear.
Q: What actual impact will the ceasefire agreement have on the bond market rebound?
A: The ceasefire news initially spurred a short-term rebound in the bond market, but yields only fell back to mid-March levels. Market expectations for the number of Fed rate cuts in 2026 have been significantly revised downward from two at the beginning of the year to only one (with a probability slightly above 50%), clearly limiting the rebound's strength.
Q: How will energy shocks limit the policy space of central banks?
A: Central banks around the world are highly vigilant about supply shocks pushing up inflation expectations. The Reserve Bank of India and the Reserve Bank of New Zealand have kept interest rates unchanged and are paving the way for rate hikes, while Japan's rate hike path is becoming clearer. Even with slowing economic growth, high inflation makes rate cuts unlikely, leaving policymakers with insufficient room for maneuver.
Q: How should investors adjust their bond market strategies in the current environment?
A: The bond market still has some room for rebound, but it is unlikely to return to pre-war low yield levels. Investors need to pay attention to energy price trends and central bank policy signals. In the short term, they can seize the rebound opportunities brought about by the ceasefire, but in the long term, they should prepare for interest rates to remain at a higher level for a longer period of time and avoid over-betting on aggressive interest rate cuts.
Editor's Summary
The energy shock triggered by the war with Iran has profoundly altered expectations in the global bond market. Even if a ceasefire is achieved, high oil prices and inflationary pressures will persist for a long time, making it unlikely that the pre-war bets on interest rate cuts will recur. The FTSE World Government Bond Index recorded a sharp decline in March, and the upside potential for the bond market is currently limited, with yields in major economies still far above pre-war levels .
With limited policy space available to the central bank, investors should prepare for interest rates to remain at higher levels for an extended period .
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