Global Bond Yields Hold Steady as Hormuz Closure Fuels Inflation Fears

U.S. Treasury and Eurozone government bond yields held steady near multi-week highs on Monday, as the inflationary shock from surging oil prices offset the typical flight-to-safety demand driven by geopolitical turmoil.

Markets Digest Geopolitical Shock

The stability in fixed-income markets follows Iran's announcement over the weekend that it had closed the Strait of Hormuz, a critical chokepoint for global oil transit. The move sent Brent crude prices surging by 4.4%, immediately reigniting concerns about persistent inflation and its impact on central bank policy.

As of Monday morning, key government bond yields were little changed but remained elevated after a sharp selloff last week:

• The benchmark German 10-year Bund yield was at 3.05%.
• The rate-sensitive German 2-year yield stood at 2.68%.
• The U.S. 10-year Treasury note yield was at 4.57%.
• The U.S. 2-year yield, a close proxy for Fed policy expectations, was at 4.22%.

Inflation Fears Counteract Safe-Haven Bids

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Typically, escalating geopolitical risk prompts investors to seek the safety of government bonds, pushing prices up and yields down. However, the nature of the current crisis—a direct threat to energy supplies—has created a powerful counter-current. The prospect of a prolonged energy crunch is forcing markets to price in higher inflation, which erodes the value of fixed-income assets and puts upward pressure on yields.

This dynamic was evident last week, when Eurozone bonds experienced their most significant selloff in over a month, according to Investing.com. The German 10-year yield recorded its largest weekly increase in five weeks as traders increased bets that the European Central Bank (ECB) might pause its rate-cutting cycle to combat the new inflationary impulse.

Central Bank Speakers in Focus

Investors are now closely watching for guidance from central bank officials. Upcoming remarks from ECB Executive Board member Isabel Schnabel and Federal Reserve Governor Michelle Bowman—both known for their hawkish policy stances—will be scrutinized for any signals on how they view the inflation risks stemming from the crisis.

Later in the week, markets will also face Federal Reserve Chair Kevin Warsh's congressional testimony and the release of the crucial U.S. Consumer Price Index (CPI) report for June, which will provide a clearer picture of the inflationary landscape.