(Bloomberg) — Sovereign bonds rose around the world as concern the Middle East conflict will derail global economic growth revived demand for beaten-down government debt.<\/p>\n
US Treasuries advanced with UK and Japanese bonds on speculation that surging oil prices may be just a harbinger of a protracted global fuel shortage. That\u2019s helping boost demand for government debt that until recently had been under selling pressure as fears over quickening inflation outweighed their traditional haven appeal.<\/p>\n
\u201cThe market is now letting its imagination run wild about what the world might look like in a month\u2019s time if there is no resolution by then\u201d to the war, said Gareth Berry, a strategist at Macquarie Group Ltd. \u201cParallels with Covid are already being identified as economies are at risk of shutting down \u2014 this time due to lack of fuel.\u201d<\/p>\n
The bond rally comes after weeks of selling that was driven by surging oil costs and concern over potential central bank interest-rate hikes. The recent shift in focus toward slowing economic growth is easing fears that central banks will need to adopt an aggressively hawkish stance to control inflation.<\/p>\n
Yields on Treasury two-year notes, among the securities most sensitive to shifts in monetary policy, fell five basis points to 3.86%, after sliding seven basis points on Friday. Those on benchmark 10-year debt dropped six basis points to 4.37%.<\/p>\n
UK and German 10-year yields both fell two basis points to 4.96% and 3.07% respectively. Japanese equivalents declined one basis point to 2.37%.<\/p>\n
What Bloomberg Strategists Say…<\/p>\n
\u201cThe bull-steepening trend is likely to extend as investors pivot toward concerns about a growth slowdown after spending much of March pricing in a war-induced surge in inflation expectations\u201d<\/p>\n
Garfield Reynolds, Markets Live strategist<\/p>\n
Some of the biggest bond funds in the US including Pacific Investment Management Co. say financial markets are underestimating risks the Iran war will trigger a sharp slowdown. Goldman Sachs Group Inc. said the probability of a downturn over the coming year has risen to about 30%.<\/p>\n
The war \u2014 now in its second month \u2014 is showing no sign of ending even after the US extended a deadline for Tehran to agree to reopen the Strait of Hormuz. This has left Brent crude on track for a record monthly increase. It was up more than 2% at around $115 a barrel in Monday trading.<\/p>\n
US President Donald Trump said in a social media post earlier that the administration is in \u201cserious discussions\u201d with the regime, threatening further attacks on Iran\u2019s oil and electricity infrastructure if a deal is not reached.<\/p>\n
Matthew Hornbach, global head of macro strategy at Morgan Stanley recommended buying five-year Treasuries and betting on a steeper yield curve between the seven- and 30-year tenors in a note published on Friday.<\/p>\n
\u201cIf energy prices continue to climb, then downside risks to growth should rise further,\u201d he wrote.<\/p>\n
Wall Street veteran Ed Yardeni said bond vigilantes have mobilized globally since the start of the conflict, resulting in over-bearishness in some parts of debt markets.<\/p>\n
\u201cThe front end of the yield curve is priced for a tightening policy response that we doubt is coming, so we consider it to be oversold,\u201d Yardeni wrote in a research note, referring to Treasuries.<\/p>\n
–With assistance from Alice Gledhill.<\/p>\n
(Updates prices, adds Trump comment in paragraph nine.)<\/p>\n