Global bond markets are expected to experience some recovery following a recent ceasefire agreement between the United States and Iran but are unlikely to return to their pre-conflict levels, as elevated energy prices and persistent inflation continue to influence investor sentiment and central bank policies.
The ceasefire, announced late Tuesday, involves a two-week pause in hostilities and the reopening of the Strait of Hormuz, a crucial energy transit route. U.S. President Donald Trump highlighted these terms as conditions of the truce. Despite the announcement, ongoing violence attributed to Iranian-backed forces, as well as renewed attacks by Israeli groups in Lebanon, have cast doubt on the durability of the ceasefire. Following the truce, global markets initially reacted positively, with oil prices dropping below $100 per barrel for the first time in two weeks and stocks and bonds rallying. However, experts caution that these gains may be limited.
The conflict-driven energy shock has reinforced concerns over persistent inflation, which many economists and investors see as more structurally embedded than previously anticipated. Inflation has remained above target levels in major economies for several years, and the recent volatility in energy prices has exacerbated these pressures. As a result, pre-war expectations for interest rate cuts this year—especially in countries like the United States, the United Kingdom, and oil-producing Norway—have largely been abandoned.
Central banks are maintaining a cautious approach amid ongoing geopolitical risks. More than two-thirds of central banks surveyed recently identified geopolitical tensions as the primary threat to economic stability. On Wednesday, the Reserve Bank of India and the Reserve Bank of New Zealand both kept interest rates steady at 5.25% and 2.25%, respectively, but signaled a readiness to raise rates in the near future if inflationary pressures intensify. The New Zealand central bank noted that any signs of sustained inflation or rising medium-term expectations would prompt decisive action to maintain price stability.
Bond markets in Europe, Britain, Australia, and the United States showed strength following the ceasefire announcement, with yields retreating to levels seen in mid-March. The 10-year U.S. Treasury yield settled around 4.23%, while the two-year yield remained near 3.65%, aligning closely with the Federal Reserve’s target federal funds rate range. Market analysts highlight that while there is space for a bond rally, the risk of further rate hikes remains significant, especially as central banks seek to prevent the recent supply shocks from embedding higher inflation expectations.
The Bank of Japan appears poised to increase rates in April, with some strategists interpreting the ceasefire as reducing uncertainties related to Gulf energy supplies, which Japan heavily depends upon. Similarly, investment firms are revising earlier projections for rate cuts in China, a country that has struggled with deflationary pressures.
Despite market optimism on the ceasefire easing recession worries, policymakers continue to emphasize vigilance. Indian central bank Governor Sanjay Malhotra remarked that inflation risks remain tilted to the upside. The overall consensus suggests a cautious stance ahead: markets may recover some ground but are unlikely to revert fully to the stable conditions seen prior to the recent geopolitical tensions and energy shocks.