Brent crude futures are down by more than 7.6% on Monday, trading around USD 95.65 per barrel. The main factor calming sentiment on the oil market is reports that the United States and Iran have moved closer to reaching an agreement. According to these reports, the proposed deal could lead to the reopening of the Strait of Hormuz, an end to military operations, the unfreezing of part of Iran’s frozen assets and the launch of further talks on limiting Tehran’s nuclear programme. President Donald Trump has stressed, however, that Washington will maintain the blockade of the Strait of Hormuz until a formal agreement is reached, adding that he does not intend to “rush” into a deal.
The conflict has increased expectations of more hawkish action from central banks. At the same time, the rise in long-term bond yields is no longer driven solely by fears of inflation caused by war and higher oil prices. It is becoming increasingly clear that pressure on the debt market is also being driven by deeper structural factors linked to high government debt, growing bond supply, the possibility of interest rates remaining higher for longer and broader changes taking place in the global economy.
This is particularly visible in the United States, where the increase in long-term bond yields has been largely driven by higher real yields, meaning interest rates adjusted for inflation. This suggests that investors are not reacting only to short-term risks such as rising oil prices or a temporary acceleration in inflation. Market-based measures of inflation expectations have not risen as strongly as yields themselves. Long-term inflation expectations in the US remain lower than in 2022 and are close to the levels observed in December. This suggests that the bond market is pricing in more than just the risk of more expensive energy.
One of the most important sources of this pressure is public finances. In the US, investors are paying increasing attention to the high budget deficit, rising debt-servicing costs and the prospect of larger Treasury bond issuance. The greater the borrowing needs of the state, the more debt supply reaches the market. In such circumstances, investors may demand a higher risk premium and greater compensation for allocating capital to long-term securities.
An additional factor affecting financing costs is the investment boom linked to artificial intelligence. Technology companies are spending vast sums on building data centres, developing semiconductor infrastructure and carrying out other capital-intensive projects. Some of these investments are financed through corporate bond issuance, which increases demand for capital and may push up its price. In the short term, the development of artificial intelligence — although it may improve economic productivity in the future — may therefore contribute to keeping financing costs elevated.
On other major bond markets, the situation is somewhat different. In Japan and Germany, inflation expectations played a larger role in the rise in yields, while in the United Kingdom additional pressure continues to come from political uncertainty and the risk of looser fiscal policy. The common denominator, however, is the belief that the era of very cheap money may not return as quickly as previously assumed.
Bond yields may not fall significantly even if war-related tensions ease and oil prices stabilise, because the debt market is beginning to price in deeper changes: growing government borrowing needs, greater bond supply and the possibility of a lasting increase in the neutral interest rate. This would mean that the global economy is entering a period of higher financing costs than just a few years ago, when high savings and very low interest rates dominated.
The current rise in bond yields should therefore be interpreted more broadly than merely as a reaction to war and oil prices. Even if the inflation risk linked to the conflict weakens, financing costs may remain elevated. Government debt, large bond issuance, rising investment needs and structural changes in the economy may prove decisive, gradually reshaping the conditions under which the global capital market operates.
Source: CEO.com.pl
