Investors are closely monitoring bond markets for signs of stabilization following a prolonged period of elevated volatility and losses. The recent sell-off has been driven in part by rising inflation concerns, with the sharp increase in oil prices this year playing a key role. Brent crude briefly fell below $100 per barrel last Friday after the Group of Seven (G7) nations agreed to release crude and diesel reserves, but prices soon rebounded to around $102. The tight correlation between crude oil and U.S. Treasury yields is the strongest seen since the Gulf War in 1990, underscoring the influence of energy costs on inflation expectations.

In Europe, government bond investors remain cautious amid lingering concerns about fiscal deficits across the Eurozone, particularly in France. Although markets recovered some ground on Friday following losses earlier in the week, uncertainty persists. “Our worry remains around deficits as we do not see any major economy taking steps to control deficits over the next 12 months,” said Mohit Kumar of Jefferies.

U.S. economic data may offer potential relief for bond investors. The labor market added 29,000 jobs in September, falling short of expectations and prompting initial gains in Treasury prices. The yield on the 10-year Treasury note briefly dipped to 5.16 percent before rising to about 5.28 percent, well above June’s 4.42 percent level. The weaker employment figures reduce the likelihood of another Federal Reserve interest rate increase at its October 28 meeting, with futures markets currently assigning only a 20 percent chance of a hike. Analysts note that any positive inflation data ahead of the meeting could further temper expectations of rate rises, which have contributed to the global bond sell-off.

Market participants will also closely watch the University of Michigan’s preliminary consumer sentiment survey for October, due for release on Friday. The survey has gained significance since the COVID-19 pandemic for its insights into inflation expectations. The September reading showed consumer sentiment at a four-month low while inflation expectations reached their highest level since May, sparking a sharp sell-off in U.S. Treasuries. Analysts surveyed expect a weaker sentiment reading for October, and any indication of heightened inflation fears could trigger further bond market volatility. Conversely, a strong consumer sentiment reading could also unsettle markets, as investors weigh the resilience of the U.S. economy despite global inflationary pressures, including those linked to the conflict in Iran.

Separately, the UK housing market is under strain amid rising mortgage rates driven by higher inflation and energy costs. The Lloyds House Price Index for September, expected Wednesday, is anticipated to confirm recent declines, following Nationwide data showing house prices have fallen in four of the last five months. Mortgage rates have increased alongside yields, reflecting expectations that the Bank of England will maintain higher interest rates. Financial markets currently price in a 90 percent probability of a quarter-point rate hike from the current 3.75 percent at the Bank’s November meeting.

London’s housing market has been especially weak, continuing a decade-long trend of underperformance relative to the rest of the UK. In some upscale neighborhoods like South Kensington, average prices remain flat compared to 2013 levels. The latest monthly survey by the Royal Institution of Chartered Surveyors will provide additional details on housing demand, sales, price expectations, and rental market impacts. Sandra Horsfield, an economist at Investec, noted that UK property market conditions “will remain strained for a while,” though she added that a significant decline in energy prices next year could lead to lower policy rates and mortgage costs, potentially enabling the market to recover.