Weak investor sentiment amid ongoing conflict weighs on risk sensitive markets. Front end treasury yields higher. Market pricing indicates less than one Fed rate cut this year

Oil prices have surged again, weighing on risk sentiment. Brent traded above US$100 per barrel after President Trump said preventing Iran from acquiring nuclear weapons was a higher priority than oil prices. A record release of strategic oil reserves has failed to cap the rally, while concerns around private credit and fresh US tariff probes added to the risk‑off tone. Global equities sold off, with the S&P 500 down more than 1%, bond yields are higher, and the US dollar firmer against G10 currencies.

Prospects for a rapid restoration of oil flows through the Strait of Hormuz are fading. Iran’s new leader has vowed to keep the route closed, with seven vessels reportedly struck in the past day. While US officials expect naval escorts to be in place by end‑March, the International Energy Agency has downgraded its oil‑supply growth outlook, warning the Middle East conflict is driving an unprecedented disruption to global energy markets.

Second‑tier US data had little impact on price action, with geopolitics remaining the dominant driver. The market has continued to pare back expectations for Fed easing, with just 22bp of cuts priced by December. This represents a sharp reversal of the post‑payrolls move late last week, as concerns around the inflationary impact of higher oil prices have re‑emerged.

US Treasuries sold off, led by the front end, as markets priced less than one Fed cut this year. 2‑year yields rose 6bp to 3.72%, the highest level in over six months, continuing the sharp rebound from below 3.40% earlier in March. The long end was more stable, with 10‑year yields little changed at 4.24%, near the top of the recent range. Curve flattening extended, with the 2s/10s narrowing to around 52bp.

European bond markets remain under pressure, with 10‑year Bund yields rising to multi‑year highs at 2.96%, matching the previous cyclical peak in 2023. Global yields are being pushed higher by concerns the Iran conflict will lift defence spending and widen fiscal deficits, alongside renewed energy‑driven inflation risks and increased sovereign borrowing needs.

The US dollar is broadly firmer against G10 currencies in offshore trade, with the DXY back near the top of its recent range. Moves in the majors were modest, but risk‑sensitive currencies underperformed, with the NZD and AUD the weakest in the G10 basket. NZD/USD slipped to 0.5860, near recent lows, with the NZD weaker on most crosses aside from NZD/AUD, which was little changed.

NZ swap rates traded higher in a largely parallel shift in the local session yesterday reflecting moves in offshore markets. There market is again pricing more than 50bp of RBNZ tightening by end-2026. We finalised our Q4 GDP forecast at 0.3% after the latest partials which is below the RBNZ’s 0.5% projection from the February MPS though the market remains focussed on geopolitics for now. 2-year rates closed 11bp higher at 3.27%, with the market closing in on Monday’s multi-month high of 3.31%.

There was a similar parallel shift in the government curve. The weekly bond tender saw solid appetite from investors – particularly for May-41 line - despite the ongoing volatile conditions in fixed income markets. The backup in yields into the auction likely contributed to demand. 10-year government bonds closed 10bp higher at 4.67%.

The PMI is released today after printing a firm 55.2 in January, pointing to solid momentum in manufacturing activity. While the survey period covers February and should be largely insulated from recent geopolitical developments, sentiment effects may be evident at the margin. In the UK, January GDP is the key release. The US PCE data is unlikely to move markets given it is dated and will form the baseline as the market incorporates the inflationary implications of higher energy prices. Elevated geopolitical risks and oil prices are also likely to weigh on Michigan consumer sentiment.

SAtuart Ritson is a senior Markets Strategist at BNZ Markets.