Silent earthquake in the global bond market due to war economy

The $145 trillion global bond market is witnessing a silent earthquake that may be more dangerous than the 2008 financial crisis. The escalating tensions in the Middle East not only ignited energy prices and destabilized stock markets, but their effects extended to strike the second largest global financial market at the core, as it is the backbone of financing for governments and companies around the world.

According to a report on Al Jazeera prepared by colleague Nadim Al-Mallah, the bond market – or what can be defined as the borrowing market – has turned into an arena for mass escape sparked by the repercussions of the war.

The rise in oil prices has stoked inflation globally, prompting central banks to raise interest rates, causing bond prices to plummet to levels not seen in the world since the financial crisis.

Yields on 30-year long-term bonds in the United States, the world’s largest bond issuer, exceeded 5% for the first time in nearly two decades. Within just one month, more than two and a half trillion dollars evaporated from global bond markets, the largest monthly decline in 3 years.

Crossfire

In explaining the meaning of the turmoil in the bond market, the report explains that the cost of borrowing for governments, companies, and even individuals is rising at a turbulent pace at a time when the world needs liquidity to confront the repercussions of war and inflation.

Developing countries will be in the crosshairs, especially countries in Asia and Africa that depend on external financing, as they will face costly borrowing and greater debt service that will add greater burdens to their budgets.

Developing countries will also witness an outflow of foreign capital in search of higher returns in developed markets, which will put pressure on their local currencies and foreign exchange reserves.

The current crisis is like a snowball, as it is rolling from the Strait of Hormuz, to Wall Street and global markets, and into people’s pockets. The repercussions – according to Al Jazeera’s report – will not remain confined to trading halls or the offices of finance ministries.

The report adds that rising bond yields mean higher borrowing costs across the entire economy, starting with mortgages, passing through corporate loans, and ending with consumer loans, all of which will put pressure on financial capacity and solvency, and if the state of uncertainty continues, oscillating between no peace and no war, this will lead to an economic slowdown and then a recession.

As uncertainty continues regarding the fate of the US-Israeli war on Iran, which broke out on February 28, the economic crisis that the world is witnessing as a result of the repercussions of this war continues, most notably the closure of the Strait of Hormuz by Iran.