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Bond markets remain volatile, but the real risk lies in how long the conflict persists

Global bond yields have moved sharply higher as the Middle East conflict pushes energy prices up and markets brace for a renewed inflation shock. The UK 10y gilt yield rose above 5% before falling back to 4.86%, reflecting expectations that central banks may need to keep policy tighter for longer, with the same pattern unfolding across global bond markets - US Treasury yields and core Eurozone benchmarks have also pushed higher, with the Italian 10‑year BTP rising above 4%, its highest level since July 2024.

Limited swap repricing vs. previous energy‑driven shocks as tailwinds remain

Global swap rates continue to edge higher, with 5-year SONIA at 4.21% (+16bps YoY), vs c.+40bps in 5-year Euribor. However, the move remains modest relative to past shocks, with both the Russia–Ukraine invasion and the 2021 supply-chain disruption driving more sustained repricing across energy and rates. Even so, most economists do not expect the BoE to raise rates this year. While market pricing has moved higher, expectations of 3 additional hikes appear overdone, with broader data still pointing to gradual cooling rather than re-acceleration.

UK PMIs point to gradual cooling as economy absorbs energy shock

March’s PMI data suggests the UK economy is already beginning to adjust to higher energy costs, with both the UK Manufacturing PMI (51.4) and the UK Services PMI (51.2) still in expansion but showing a modest loss of momentum. The recent energy shock is unlikely to have been fully anticipated by businesses, pointing to a period of softer activity ahead as higher input costs feed through. As a result, gradual moderation in growth over the coming months appears the more likely path.