Large moves higher in global bond yields led by shorter maturities. Investor risk appetite remains subdued - global equities under pressure. ECB leaves rates unchanged as markets reflect expectations of hikes ahead. Ditto Bank of England

Global markets remained volatile overnight, with equities under pressure as Middle East headlines lifted energy prices and pushed global yields higher. The S&P is 0.6% lower in afternoon trade with larger falls in European markets. Brent briefly spiked to about $119 per barrel. Government bond yields are sharply higher led by the front end of the curve. Central banks (ECB, BoE and BoJ) followed the Fed in holding policy steady but flagged a tightening bias if the conflict keeps energy prices elevated.

Oil and natural-gas prices remain elevated after the latest round of attacks on Middle Eastern energy facilities stoked fears of a full-blown energy crisis. Futures for European natural-gas prices rocketed after Qatar said that Iranian strikes caused extensive damage to its Ras Laffan, the site of the world’s largest liquefied natural gas plant. Higher energy prices pushed up global bond yields ahead of the central bank rate decisions.

The Bank of England left Bank Rate unchanged at 3.75% at its March meeting, as widely expected, with the MPC voting unanimously to hold. Guidance was notably reset, with the Committee dropping its easing bias and emphasising that it “stands ready to act as necessary” to ensure inflation returns to the 2% target over the medium term. The BoE expects March CPI to print near 3.5% and, based on current commodity price assumptions, sees inflation running between 3% and 3.5% over the next couple of quarters.

UK yields spiked higher following the BOE. 2-year gilt yields were already 10bp higher ahead of the meeting, and increased close to 40bp at one point, before retracing. Governor Bailey made unscheduled comments to the media cautioning against drawing strong conclusions about rate hikes which contributed to a pullback off the yield highs. The market is pricing almost 70bp of hikes this year.

The ECB left rates unchanged at 2.00%, signalling little urgency to adjust borrowing costs. Updated staff forecasts incorporate much of the recent lift in commodity prices and point to a temporary inflation overshoot in 2026 that largely fades next year, with only limited spillover into core inflation. Against a backdrop of elevated market volatility and ongoing geopolitical uncertainty, the Governing Council struck a cautious tone. Nonetheless market pricing implies around 70bp of rate hikes by December.

The Bank of Japan held its policy rate at 0.75% as Middle East tensions and the outlook for oil prices added a fresh layer of uncertainty while keeping its inflation forecasts intact and reiterating it will lift borrowing costs if its price path stays on track. Governor Useda kept the possibility of an April hike when speaking at the press briefing after the decision. The market is pricing around 15bp of tightening for the April meeting.

Curve flattening has been the key theme across global bond markets. 2-year treasuries reached an intra-day peak of 3.95% before settling 9bp higher at 3.85%. 10-year notes briefly traded to six-month highs above 4.30% but are currently little changed at 4.27%. The 2y/10y curve has retraced to 41bp. The front end of European rates markets are sharply higher.

The US dollar is weaker against the major FX pairings with the yen outperforming. Finance Minister Katayama said she has an extremely high sense of urgency regarding recent currency moves. The pound and euro extended gains following the central bank meetings. The NZD is marginally stronger relative to the local close but lagged the move in the euro and yen.

NZ rates markets sold off in the local session yesterday taking reflecting higher global yields following the FOMC. The weaker than expected Q4 GDP print contributed to a dip in yields but this proved to be short-lived. 2-year swap rates increased 10bp to 3.37% reversing a two-day rally and putting yields back up towards the cycle high. It was a parallel curve shift – 10-year yields ended the session 9bp higher at 4.33%.

The weekly government bond tender had NZ$1.4 billion of bids which was on the lower end of the range for the fiscal year with increased market volatility offsetting the pull factor from higher yields. Bonds closed 8-9bp higher across the curve. Australian 10-year bond futures are 4bp higher in yield terms since the local close – with a larger move in the 3-year contract – which points to an upward bias for NZ rates on the open.

Data flow is light into the end of the week. Locally, February’s trade balance is the key release. Offshore, focus is on Canadian retail sales.

Stuart Ritson is a senior Markets Strategist at BNZ Markets.