Bond Markets Under Pressure: What’s Next for Treasuries and Gilts?

• Since the US attack on Iran on 28 February, global sovereign bond markets have come under significant pressure.

• Inflation fears, caused primarily by the sharp increase in energy prices, have led to volatility in yields across major economies as investors reassess how monetary policy will respond to the shock.

• In this Cordoba note, we assess the implications of the conflict for US Treasuries and UK gilts, with a focus on policy expectations and the impact on investors holding duration exposure.

The Global Bond Market Reaction

• The UK 10-year gilt yield briefly surpassed 5% on 20 March, its highest level since the Global Financial Crisis. Similarly, the US 10-year Treasury yield rose by around 17bps to 4.17%, reaching levels comparable to the repricing seen following President Trump’s ‘Liberation Day’ announcement last year.

• This move has been mirrored globally, with Italian BTPs, French OATs, and German Bunds also experiencing sustained selling pressure.

• Traditionally, geopolitical shocks lead to a flight into safe-haven assets such as sovereign bonds. However, energy markets have made this shock different. Brent crude rose sharply, from around $73 per barrel pre-conflict to as high as $126, forcing a reassessment of inflation expectations and pushing bond risk premia higher.

• As a result, bonds have failed to act as a defensive hedge during this crisis, with inflation concerns and growth impacts spooking investors.

A focus on Treasuries

• US borrowing costs have increased sharply following the escalation of the conflict with the 10-year yield increasing by 44bps to 4.38%. Moreover, the 2-year yield surged by 12bps to 4%.

• The rise in term premiums reflects growing concerns around long-term, persistent inflation affecting the US economy.

• Prior to the conflict, the prevailing market was focused on a gradual disinflation path with investors pricing in two to three Fed cuts over the course of this year. This view has shifted with Fed fund futures pricing in a 30% probability of a rate hike this year.

• This crisis presents an interesting challenge for monetary policy. The Middle East turmoil brings a shock that may cause stagflation as rising energy prices push inflation expectations higher while also posing downside risks to growth.

• Last week, rates were left unchanged and the bulk of the Federal committee stated they still expect a quarter-point cut this year. Powell emphasised much more strongly that the outlook was covered with uncertainty.

• On one hand cutting rates too early risks furthering inflationary pressure, especially if energy prices have an uncertain time lag as to when they feed into wider price levels. However, holding rates for extended time risks weakening growth that was already slowing.

• Therefore, for investors holding treasuries, the rise in yield has led to immediate price drawdowns. As the war continues and policy uncertainty increases, term premium and volatility could further rise, exacerbating the losses for investors.

Gilts: Even worse off?

• The UK is especially sensitive due to its larger exposure to imported energy in comparison to the US. Hence, the gilt market has experienced one of its worst performing weeks in 3 and a half years.

• This has been reflected in the yield curve. The 10-year gilt yield surpassed 5% on 20 March, while the 2-year gilt yields have increased by close to 100bps since the conflict began. This sharp repricing on the front end highlights the aggressive reassessment investors are having on the BoE’s policy path.

• The market before the conflict was focused on the Bank of England’s gradual easing cycle with expectations for rate cuts. In the last meeting, however, rates were kept at 3.75% and markets are now pricing in multiple rate hikes this year.

• The vulnerability of gilts is also from fiscal concerns. Recent estimates suggest that the sell-off has eroded approximately £4.5bn of the UK’s fiscal headroom, further complicating efforts to meet the budget targets.

• There seems to be a growing disconnect between the policy paths the market is implying and central bank guidance.

Our view: An opportunity worth the risk?

• The ongoing conflict has created a difficult environment for policymakers to navigate. The extent to which the energy shock feeds into broader inflation, particularly through second-round effects on wages and core prices will be the key variable in influencing fixed income markets.

• This has introduced a level of uncertainty in rates markets that has not been seen in recent cycles. With Treasuries and gilts both declining in value, the question of whether this presents a buying opportunity is increasingly relevant.

• From a valuation perspective, higher yields, particularly at the long end may begin to look like an attractive carry, especially given the steeper nature of the curve. However, this needs to be balanced against the risk that further inflation exacerbates bear steepening, worsening capital depreciation. This duration risk is likely greater than the potential returns from a carry and roll-down strategy.

• Coming into 2026, bullish expectations were set regarding rate cuts. The recent sell-off could arguably be seen as less of a panic from investors, but rather a repricing of overly optimistic views with inflation risks emerging.

• The difficulty in calling a bottom lies in the geopolitical uncertainty. Developments between the US and Iran remain highly unpredictable, and ‘de-escalation’ could shift inflation expectations. This was evident with President Trump’s ‘claims’ of ongoing talks with Iran which furthered bond market volatility. Hence, timing the entry into long-term bonds is particularly challenging in these cloudy circumstances.

• Overall, the recent bearish moves in the global sovereign bond market exhibit the limitations of these assets as a hedge during an inflation shock. This event reinforces the limitations of sovereign bonds as safe-haven assets, highlighting that their effectiveness is increasingly dependent on the underlying macro regime.

• Therefore, our view is to remain cautious and wait for greater clarity, either via stability in energy markets or more definitive guidance from central banks, before increasing exposure to duration.