Global bond markets saw significant volatility in May as the Iran conflict pushed yields to multi-decade highs before falling back due to peace talks progress and weak economic data.
The global bond market experienced a rollercoaster ride in May, with yields surging to unprecedented levels amid the ongoing Iran war. The 30-year US Treasury yield reached its highest point since 2007 at around 5.2% on May 20 as traders anticipated central bank rate hikes and inflation concerns. This move was driven by signs that peace talks were stalling, pushing oil prices back above $110 per barrel, along with hot US price data.
The impact of the Iran conflict was felt worldwide, with British yields hitting their highest levels in two or three decades, some Japanese yields reaching record highs, and Germany’s 10-year yield peaking since 2011. “The market's concerned that inflation may be here a bit longer than we had anticipated,” said David Zahn, head of European fixed income at Franklin Templeton.
However, as the US and Iran reported progress in talks and weak economic data, particularly in Europe, borrowing costs fell back. Eurozone economic activity contracted sharply for the first time in two-and-a-half years due to rising energy costs. The US economy remained resilient, supported by AI spending, leading traders to fully price out bets on any Federal Reserve rate cuts this year.
The UK gilt market also experienced significant volatility, with 30-year gilts reaching their highest levels since 1998 at 5.87% in mid-May due to fears of increased government spending. As peace hopes grew and economic data weakened, yields fell around 21 basis points from April 30 to May 29 but remained up 58 basis points since the start of the conflict.
Global equities saw a slight rebound as investors returned to equity funds in the week ending May 27 after a week of outflows. A rally in AI-linked stocks, particularly Nvidia's robust demand for its flagship chips, revived investor interest. US and European equity funds attracted net inflows, while Asian funds recorded net outflows.
Global bond funds extended their winning streak to an eighth week, pulling in $18.15 billion. Short-term bond funds, euro-denominated bond funds, and corporate bond funds led the demand with a combined net inflow of $8.23 billion. Money market funds saw net outflows of $4.46 billion after reversing significant inflows the previous week.
In emerging markets, equity funds shed a net $4.45 billion for a fifth consecutive week, while bond funds attracted a net $1.08 billion. Overall, precious metals funds, including gold, recorded a net $584 million in outflows, marking their fourth weekly decline in five weeks.
The fluctuating global bond market highlights the ongoing tension between inflation concerns and economic uncertainties, with key events such as peace talks and economic data playing crucial roles in shaping investor sentiment.
