We’re still not getting much good news on the geopolitical front, which might be good for USOIL, but not so much for the rest.
Starting with Eastern Europe, Russia’s Defense Ministry said it would step up strikes on military targets in Kyiv and other parts of Ukraine, in response to Zelenskyy saying Ukraine would intensify attacks on Russian refineries.
And even without that, Russia’s new budget suggests that war, rather than peace, remains the baseline, with military spending rising to 17.1 trillion rubles, or around 7% of GDP, in 2027, up from an average of 2.8% in 2017–2021.
In the Middle East, the U.S. withdrew B-1 bombers from Fairford amid warnings of a possible Iranian attack, not clear signs of a deal. Hence, government bond yields briefly hit their highest levels since 2002 before pulling back.
If both wars ended next week, what would happen to global bond markets?
Sure, the immediate reaction would be positive as one of the main inflation risks would fall, giving central banks less reason to keep monetary policy so tight.
Beyond that, though, there’s a bigger problem: rising bond yields aren’t just about the energy crisis, with governments running huge deficits and continuing to take on more debt, including for defense.
Another negative factor for government bonds is growing competition for capital from AI companies, which is putting further upward pressure on yields.
So while yields may correct lower in the short term on geopolitical developments, we shouldn’t expect them to return to pre-war levels until other fundamental problems are resolved.
That’s why, for now, it’s worth being cautious with long-term bonds from heavily indebted countries like France, as well as with the EUR/USD pair. And when it comes to corporate bonds, the higher the benchmark cost of borrowing, the more expensive it is for companies to take on debt, so it makes sense to focus on companies with stronger balance sheets.
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