It was one of the most significant market shifts since the onset of the war in Iran: the surge in yields. This is a trend we have been detailing in these columns for several weeks now, to the point that last week we headlined that rate hikes had already taken place.
Indeed, the spike in energy prices reignited inflationary fears. Added to this was further pressure on public finances, as governments sought to cushion the impact on their economies. This backdrop pushed European long-term rates back to their highest levels in 15 years.
The overnight announcement of a two-week ceasefire by Donald Trump has reversed this trend. The market now anticipates a negotiated exit and the reopening of the Strait of Hormuz. Consequently, oil prices plunged almost $20 a barrel.
In the fixed-income market, the French 10-year yield shed over 20 basis points, the German 10-year fell by over 15 basis points and the British 10-year dropped by around 20 basis points. These are violent moves, reflecting both the scale of market relief and the magnitude of the rally recorded over the past month.
Nevertheless, there is no guarantee that rates will return to their pre-conflict levels. Even if hostilities end today, it will take time to restore normalized energy supplies. For instance, the Iranian strikes on the Ras Laffan field three weeks ago damaged 17% of Qatar's LNG capacity for the next 3 to 5 years, according to QatarEnergy's CEO.
Prices are therefore expected to remain high in the coming months. In this context, the path for central bank rate cuts is much narrower than it was six weeks ago.
Another factor supporting this view is that Gulf States will need to spend heavily to upgrade their defenses and rebuild infrastructure. These nations typically generate significant surpluses that are partially reinvested in the West. Less available capital translates into higher interest rates.
Finally, pressure on public finances will remain intense. The war in Iran highlighted new requirements - particularly in terms of air defense - and there is an immediate need to replenish ammunition stockpiles. In the United States, the Trump administration is requesting 1.5 trillion dollars for defense in the next budget, representing a 44% increase compared to 2026.
