Oil's Return to $100 Stokes Inflation Fears, Global Government Bonds Set for Worst Quarter Since 2024

Title context: Oil's Return to $100 Stokes Inflation Fears, Global Government Bonds Set for Worst Quarter Since 2024 Text: As oil prices climb toward $100 a barrel, the Middle East conflict, the artificial intelligence investment boom and the resilience of the U.S. economy are together intensifying global inflation concerns, prompting major central banks to tighten monetary policy again, and global government bonds are heading for their worst quarter since 2024. The Bloomberg Global Government Bond Index has fallen 2.1% since the end of June, on track for its biggest quarterly decline since the fourth quarter of 2024. At that time, Trump won a second term as U.S. president, and investors braced for the inflationary pressure that could come from more expansionary fiscal policy. In this round of global bond market selling, U.S. Treasuries have been hit notably. The 30-year Treasury yield briefly broke above 5.61% on Tuesday, touching its highest level since 2002. Shorter-dated U.S. Treasuries also came under selling pressure this quarter, though some of the decline narrowed after the Federal Reserve's preferred inflation gauge came in below market expectations on Wednesday. The latest U.S. data showed that the core personal consumption expenditures (PCE) price index came in below expectations, briefly easing market concerns about inflation, but it did not fundamentally reverse this quarter's decline in the global bond market. Multiple Factors Drive Up Inflation Risks; Global Central Banks Resume Rate Hikes The ongoing Middle East conflict is pushing up energy prices, while surging investment spending in AI and the continued strength of the U.S. economy have also led investors to reassess the global inflation outlook. The market is increasingly worried that inflationary pressure may prove more persistent than previously expected. Over the past three months, central banks in Australia, the euro area, Japan, Norway and the United States have all raised interest rates, and the global monetary policy environment is tightening again. Michael Every, global strategist at Rabobank, said that in the third quarter the market not only completely abandoned expectations for long-term lower interest rates, but that this expectation has undergone a complete reversal. The key question now facing the market has shifted from "whether central banks will raise rates again" to exactly how many more hikes will be needed in the future. Money markets are now fully pricing in expectations that the Federal Reserve and the European Central Bank will raise rates three more times over the next year. French Government Bonds Suffer Heavy Losses; 10-Year Yield Rises to 4.8% Among the world's major government bond markets, French government bonds have suffered the most severe selloff this quarter. With France set to hold a presidential election next year, political uncertainty is intensifying investor concerns. With only about seven months left before the vote, the opposition and President Macron's outgoing government are still struggling to reach compromise on key issues. The French 10-year government bond yield has risen 1.15 percentage points this quarter to 4.8%, the worst quarterly performance since the euro was officially launched in 1999. French government bonds underperformed other European bonds further on Wednesday. The latest data showed that France's September inflation rate accelerated to its highest level in more than two years, further increasing pressure on the European Central Bank to control prices. France-Germany Bond Spread Rises to Highest Since 2012 Investors are now especially focused on the yield spread between French and German government bonds, viewing it as an important gauge of stress in the European bond market. The extra yield investors demand to hold French 10-year government bonds relative to German bonds of the same maturity has now exceeded 1.2 percentage points, or 120 basis points, reaching its highest level since 2012. The continued widening of the France-Germany bond spread means investors are demanding higher risk compensation before they are willing to hold French government debt, and it also reflects growing market concerns about France's fiscal and political outlook. Peter Schaffrik, a rates strategist at RBC Capital Markets, and others said in a report that even if there are no further shocks in the energy market, European government bond spreads could still widen further. With oil prices remaining high, global central banks turning back to rate hikes, and fiscal and political risks rising in major economies, bond investors are facing multiple pressures rarely seen in recent years. The market's next focus will be on whether energy prices continue to push inflation higher, and on how far the Federal Reserve and the European Central Bank will need to take this tightening cycle.