Global government bond markets were headed for one of their worst weekly losses in months, on concerns that war in the Middle East will renew upward pressure on inflation and force more hawkish pivots from central banks.

Crude oil was set on Friday for its strongest weekly gain since the extreme volatility of the COVID-19 pandemic in spring 2020, as conflict halted shipping and energy exports through the vital Strait of Hormuz.

Some German bonds posted their largest yield increases in almost three years and some U.S. short-term debt was on track for its worst week since the Liberation Day tariff turmoil.

“Energy price inflation is generally shorter term in nature. But that’s going to hit headline inflation hard,” said Thomas Urano, co-chief investment officer at Sage Advisory in Austin.

Two-year government bonds, the most sensitive to shifting rate expectations, have taken the brunt of the selloff, remaining weak even after news that the U.S. economy unexpectedly shed jobs last month.

Britain’s two-year bond, or gilt yield, has risen 35 basis points (bps) this week to the highest level since October. It is on pace for the biggest weekly yield increase since August 2024.

Germany’s two-year yields hit their highest since October 2024 and were poised for a 30-basis-point jump on the week, the biggest since April 2023.

U.S. two-year yields gained 16 basis points on the week, the most since last April’s tariff turmoil.

A rally that last week sent two-year Treasury yields to a three-and-a-half year low also left some investors offside, while others were of the view that the yield drop went too far relative to the economic outlook, said Michael Lorizio, head of U.S. rates and mortgage trading at Manulife Investment Management. That added to this week’s move.

Unwinding Bets on Short-Term Bonds

In Britain and some other countries, the week’s moves were similarly exacerbated by investors unwinding bets on short-term bonds rallying and yield curves steepening as central banks cut rates.

“There’s been a colossal stop out and positioning clean-up,” said Fidelity International portfolio manager Mike Riddell.

Money market traders are pricing a less than 50% chance of a Bank of England rate cut in the foreseeable future.

“Inflation expectations have become much more important to central banks after they were really burned in 2022,” James Rossiter, head of global macro strategy at TD Securities in London, said.

The moves have been global: Australia and Canada have both seen their borrowing costs rise around 20 bps this week.

Yields rise as prices of bonds fall.

Selling Spills to Corporate Bond Markets

The selling has also spilled over into corporate bond markets.

The iTRAXX Europe Crossover index – which captures the cost of insuring against the risk of default on a basket of high-yield corporate debt – was around 287 bps on Friday after earlier reaching 290.5 basis points, its widest since June.

A similar measure of investment-grade credit, the iTRAXX Europe Main, reached its widest since May, moving past 60 bps.

“However the conflict is resolved, it has already undermined our previous assumption that energy prices would remain low and stable this year,” Berenberg chief economist Holger Schmieding said.

The ECB is very unlikely to change rates at its next meeting and will make any decisions on a meeting-by-meeting basis, ECB policymaker Jose Luis Escriva said on Friday.

Traders are pricing in an 11% chance of a hike at the March meeting, and 29% odds of an increase at the ECB’s April meeting.

In the U.S., fed funds futures traders are not fully pricing in a rate cut until September, which this week was pushed back from July.

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(Reporting by Dhara Ranasinghe; additional reporting by Karen Brettell, Chuck Mikolajczak, Yoruk Bahceli and Alun John; Editing by Elisa Martinuzzi, Louise Heavens, Andrew Heavens, Colin Barr and Daniel Wallis)