If the Iran war is threatening financial pain for America, it is far worse for other advanced economies – particularly those in Europe
If you want to know why Donald Trump suddenly appears so eager to secure a peace deal with Iran, look no further than last week’s action in government bond markets. A sell-off in US Treasuries saw yields flirting with levels not seen since the global financial crisis, with the 30-year bond rising above 5% and the two-year above 4%.
That reflected market fears that the combination of high oil prices and a US AI-driven spending boom is poised to fuel inflation – raising the prospect of rate hikes at a moment when markets had expected the Fed, under new chairman Kevin Warsh, to be cutting. Trump spent three months trying to jawbone markets into believing that any disruption would be temporary; that strategy has reached its limits.
But if the Iran war is threatening financial pain for America, it is far worse for other advanced economies – particularly those in Europe. European government bonds have also sold off sharply. Germany’s 10-year bund hit a 15-year peak of 3.2% last week before pulling back only on news of progress in Iran peace talks. Markets are now fully pricing in two ECB rate hikes this year, with a 60% probability of a third – this in an economy where inflation had only just crept back above the ECB’s 2% target before the war began, and has since jumped to 3%. Higher borrowing costs will only add to the fiscal pressures on European governments at a time when they are already grappling with the need to increase defence spending.
