Market participants are also focusing on other risks, including the possibility of already elevated public debt levels rising further, the after-effects of the artificial intelligence investment boom, and growing expectations that central banks such as the US Federal Reserve may opt to raise interest rates instead of cutting them.
Strategists at ING Bank, Goldman Sachs, and Barclays believe that the recent rise in long-term bond yields may not completely reverse even if inflationary pressures caused by higher oil prices begin to ease.
This could result in borrowing costs remaining elevated near multi-year highs even after the conflict subsides, continuing to put pressure on governments and broader economies.
Jonathan Hill, head of US inflation strategy at Barclays told Bloomberg it is difficult to attribute the global selloff in longer-duration bonds solely to inflation concerns, especially considering how medium- and long-term inflation risks are being priced by markets.
According to him, rising debt levels, the possibility of higher neutral interest rates, and the impact of artificial intelligence-related investment trends could instead be contributing to higher real rates.
The neutral interest rate refers to the level at which monetary policy neither stimulates nor slows economic activity. Although surging oil prices have dominated headlines, measures such as breakeven rates — which reflect bond market inflation expectations — have not increased as sharply as overall yields in the US and UK.
Hill also noted that despite the ongoing conflict, 10-year breakeven inflation rates remain around 50 basis points below the levels seen during the first half of 2022, when the US Federal Reserve was aggressively raising interest rates.
