The specter of

stagflation

caused by the Iran war has wiped out more than US$2.5 trillion from the value of global bonds in March, on track for the biggest monthly loss in more than three years.

Bonds are tumbling as a surge in

oil prices

quickens

inflation

, which erodes the value of the fixed payments from debt. While the slide in bonds’ market value is less than the roughly US$11.5 trillion lost in global equities, it’s perhaps more unexpected as debt typically gains in times of geopolitical turmoil.

“Markets are beginning to price what I think is going to be a stagflationary impulse manifested very soon,” Kathryn Rooney Vera, chief market strategist at StoneX Group Inc., said in an interview on Bloomberg Television. “The longer this goes on, the higher oil prices can rise.”

The total market value of government, corporate and securitized debt has fallen to US$74.4 trillion from almost US$77 trillion at the end of February, based on a Bloomberg index. That’s on course to be the biggest drop since September 2022, when the

United States Federal Reserve

was in the midst of an aggressive cycle of

interest-rate

hikes. In percentage terms, the gauge has slipped 3.1 per cent this month.

Government debt has led declines, with a Bloomberg index of sovereign securities sliding 3.3 per cent in March, while corporate bonds have fallen 3.1 per cent, the data show.

U.S. Treasury yields have climbed to their highest levels in months after a third straight week of bond losses on speculation the Fed will be compelled to hike rates to combat inflation. In Asia, government bond yields in India, Japan and South Korea have climbed.

Australia’s 10-year yields rose to the highest level since 2011 on Monday, while those in New Zealand are at the highest since May 2024.

The selloff in bonds gathered pace Monday after

U.S. President Donald Trump

threatened to attack Iranian power plants unless the country reopens the Strait of Hormuz. Iran countered by saying it would close the waterway “completely” if that happened.

The Fed is expected to raise the possibility of hiking rates at its April policy meeting if energy prices remain high and the jobless rate is stable, interest-rate strategists at BNP Paribas wrote in a note to clients last week. The European Central Bank will need to consider raising rates as soon as next month if price pressures build further due to the Iran war, Governing Council member Joachim Nagel said last week.

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“Higher inflationary pressures limit central banks’ ability to help and some will be forced to hike into a down growth cycle to arrest inflation and also FX depreciation,” said Trinh Nguyen, a senior economist at Natixis in Hong Kong.

With assistance from Harry Suhartono, Katie Greifeld, Kurt Schussler and Romaine Bostick

Bloomberg.com