The return of oil prices to $100 heightens concerns about inflation, and global government bonds are expected to hit the worst quarterly performance since 2024

The Zhitong Finance App learned that as oil prices rise to around $100 per barrel, the Middle East conflict, artificial intelligence investment boom, and US economic resilience all heighten concerns about global inflation, major central banks are once again tightening monetary policies, and global government bonds are heading towards the worst performing quarter since 2024.

The Bloomberg Global Government Bond Index has fallen 2.1% cumulatively since the end of June, and is likely to be the biggest quarterly decline since the fourth quarter of 2024. When Trump won a second term as US president, investors were prepared for inflationary pressure that a more expansionary fiscal policy might bring.

In this round of global bond market sell-off, US Treasury bonds have been clearly impacted. The 30-year US Treasury yield once surpassed 5.61% on Tuesday, hitting its highest level since 2002. Short-term US bonds were also sold off this quarter, but after the inflation index favored by the Federal Reserve fell short of market expectations on Wednesday, some of the declines narrowed.

According to the latest US data, the performance of the core personal consumption expenditure (PCE) price index fell short of expectations. At one point, it mitigated market concerns about inflation, but did not fundamentally reverse the decline in the global bond market this quarter.

Multiple factors drive up the risk of inflation, and central banks around the world restart interest rate hikes

The ongoing conflict in the Middle East is driving up energy prices, while the surge in investment spending in the AI sector and the US economy remains strong are also causing investors to re-evaluate global inflation prospects. The market is increasingly worried that inflationary pressure may last longer than previously anticipated. Over the past three months, central banks in Australia, the Eurozone, Japan, Norway, and the US have all raised interest rates, and the global monetary policy environment is once again tightening.

Michael Every, a global strategist at Rabobank, said that not only did the market completely abandon expectations of long-term lower interest rates in the third quarter, but this expectation was completely reversed. Currently, the key question facing the market has changed from “whether the central bank will still raise interest rates” to how many times it will actually need to raise interest rates in the future.

The money market has now fully taken into account the expectation that the Federal Reserve and the European Central Bank will raise interest rates three more times in the next year.

French treasury bonds experienced a sharp drop, and the 10-year yield rose to 4.8%

Among the world's major government bond markets, French treasury bonds experienced the worst sell-off this quarter. As France holds presidential elections next year, political uncertainty heightens investor concerns. With only about seven months left until the vote, it is still difficult to reach compromises on key issues between the opposition parties and the outgoing administration of President Emmanuel Macron.

The yield on French 10-year treasury bonds rose 1.15 percentage points to 4.8% this quarter, the worst quarterly performance since the euro was officially launched in 1999. French treasury bonds further outperformed other European bonds on Wednesday. According to the latest data, France's inflation rate accelerated to the highest level in more than two years in September, further increasing pressure on the ECB to control prices.

Interest spreads on French and German bonds rose to the highest level since 2012

Investors are currently paying particular attention to the yield difference between French and German treasury bonds, which is an important indicator for measuring pressure on the European bond market. The additional yield required for investors to hold French 10-year treasury bonds compared to German treasury bonds for the same period has now exceeded 1.2 percentage points, or 120 basis points, reaching the highest level since 2012.

Interest spreads on French and German treasury bonds continue to widen, meaning investors are demanding higher risk compensation before they are willing to hold French government debt. It also reflects that market concerns about France's financial and political prospects are heating up.

Peter Schaffrik, a capital market interest rate strategist at the Royal Bank of Canada, and others said in the report that even if there are no new shocks in the energy market, interest spreads on European treasury bonds may widen further.

As oil prices remain high, central banks around the world turn back to interest rate hikes, and fiscal and political risks in major economies rise, bond investors are facing multiple pressures rare in recent years. The market's next focus will be on whether energy prices will continue to drive up inflation and the extent to which the Federal Reserve and the European Central Bank need to advance this tightening cycle.