The US-Israel-Iran conflict fuels inflation, BlackRock says US and European government bond prices may continue to fall

Amid rising oil prices and growing inflationary risks, a bond fund manager has warned that investors in US and European government bonds may need to brace for further price declines. Tom Becker, manager of BlackRock's Tactical Opportunities Fund, which oversees approximately $4.4 billion, stated that with costs related to energy, data centers chips, and military expenditures increasing, global inflationary pressures could resurface, pushing bond yields even higher.

In an interview with the media, Becker said that back in January, when bond prices rallied, he advised investors to short or reduce holdings of US Treasuries as well as government bonds from major European economies such as the UK, Germany, and Italy. As bond prices have pulled back recently, this strategy has started to pay off. Since bond yields move inversely to prices, rising yields mean bond prices will remain under pressure.

He pointed out that bond yields are still significantly lower than last summer’s levels, indicating that there is further room for increases. “Current yields are still relatively low compared to last summer and we believe there is still considerable upside potential.”

Since the US and Israel launched strikes against Iran on February 28, global bond markets have seen a marked adjustment. The yield on the US 10-year Treasury has risen about 0.27 percentage points. Meanwhile, 10-year bond yields in the UK, Germany, and Italy have increased by 0.433, 0.260, and 0.403 percentage points respectively.

Becker believes that Europe’s expanding defense spending, large-scale global investments in Artificial Intelligence infrastructure, and the Middle East conflict disrupting the supply of commodities transported via the Strait of Hormuz—including oil, fertilizers, and other critical resources—could all bring about a new inflationary shock. Inflation typically erodes the real purchasing power of fixed income assets, so investors usually demand higher yields in compensation.

Becker stated: “At the beginning of the year, the market was primarily focused on global economic growth momentum. Now we are seeing inflationary momentum taking shape on a global scale.”

This week, the European Central Bank, Federal Reserve, and Bank of England are all scheduled to hold interest rate meetings. The market will closely monitor how these major central banks assess the inflationary pressures that may arise from the Middle East conflict. If the central banks choose to maintain high rates or even tighten policies further, it could also keep bond yields elevated.

Compared to Europe, the US has some degree of policy buffer, as it is a net energy exporter. Nevertheless, with tensions in the Middle East continuing, traders have begun to bet that the European Central Bank will raise rates at least once this year.

Becker points out that the core policy objective of the European Central Bank is price stability, while the Federal Reserve needs to balance controlling inflation and supporting employment. This institutional difference also means that the ECB may take a more proactive stance when inflationary pressures rise. He commented: “This further convinces us that, should inflationary pressures continue to build, the ECB may act earlier and more aggressively than other central banks.”