Bond Market Kills Rate-Cut Bets Despite Ceasefire
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- The U.S. and Iran announced a two-week ceasefire (conditional on reopening the Strait of Hormuz and guaranteeing ships safe passage), sending oil tumbling and bonds and stocks rallying, but the bond rally only returned yields to mid-March levels: 10-year Treasuries at 4.85%, two-year at 3.72%.
- The FTSE World Government Bond Index slid more than 3% in March — its sharpest monthly drop in 1.5 years — as the energy shock forced a repricing of inflation risk that Barrenjoey's Andrew Lilley said 'brought investors closer to the truth' that inflation has been persistently high for three years.
- Fed funds futures now imply barely a 50% chance of even a single U.S. rate cut in 2026, down from pricing in two cuts at the start of the year, with TD Securities' Prashant Newnaha declaring 'rate cuts should be off the table.'
- The Reserve Bank of New Zealand and the Reserve Bank of India both held policy rates unchanged on Wednesday (2.25% and 5.25% respectively) but explicitly laid the groundwork for hikes, with the RBNZ warning that 'signs of significant second-round inflationary effects' would require 'decisive and timely increases' to re-anchor expectations.
- The Bank of Japan is now expected by Nomura's Naka Matsuzawa to raise rates in April, since 'all the other conditions, including wages and inflation, were all met already' and the ceasefire eases Gulf energy supply worries.
- Global investment banks have also scrapped earlier calls for rate cuts in China this year, despite its long-running deflation problem, and more than two-thirds of central banks surveyed by Central Banking Publications now rank geopolitics as their top risk.
Why it matters: For rate-sensitive sectors — housing, rate-sensitive equities, emerging-market debt — the 'higher for longer' regime is now structural, not tactical: the ceasefire removed recession risk but did nothing to dislodge entrenched inflation, and Fed funds futures pricing just one cut in 2026 versus two at year-start means the cost of capital stays elevated even as the acute oil shock fades.
