Bond markets are giving the first clear signal of where the war and the economy are headed, with investors estimating that the market turmoil will not be temporary. The British 10-year is moving in the range of 4,6%–4,7%, having moved away from the levels near 5% recorded at the height of the tension, while the German Bund is held near 2,9%–2,95%, remaining at multi-year highs. In the European South, the picture remains depressed, with the Italian 10-year at 3,8%–3,85%, the Greek close to 3,7%, the French at 3,55%–3,60% and the Spanish at 3,40%–3,45%, with most markets moving at 12- to 24-month highs. In the US, the 10-year rate is hovering around 4,25%–4,30%, while mortgage rates remain above 6,1%–6,2%, transferring the increased cost of money to the real economy.
Behind this move, market participants describe a “silent revision” of the basic scenarios. Oil remaining near or above $100 a barrel and tension in the Μέση Ανατολή bring back the fear of a new inflationary wave, even before the previous one has fully subsided. In contrast to previous geopolitical crises, where the bonds acted as a safe haven, this time yields are held high as inflation fears outweigh the need for safety. “The market is not returning to bonds with the same intensity as in the past,” notes a fund manager, explaining that the movement in yields mainly reflects the revision of interest rate expectations.
The second level of pressure comes from central banks themselves. The Fed has kept interest rates on hold and warned of more persistent inflationary pressures, limiting expectations for rapid cuts in 2026, while the Bank of England maintains a more “hard” stance. In the eurozone, the ECB is taking a wait-and-see approach, but officials admit that the energy shock is changing the balance. European bank executives note that if oil remains above $100 for weeks, the scenario of interest rate cuts will be significantly removed. In this environment, government debt markets act as a precursor, discounting that the cost of money will remain high for a longer period of time and that the war is turning from a geopolitical event into a macroeconomic shock with duration.
The "reversal" of markets
The reaction of bonds has a particular characteristic that worries investors. In previous crises, whether geopolitical or financial, government bonds acted as a safe haven, causing yields to decline. Today, the picture is different. Yields remain elevated even on the safest assets, such as German Bunds or US Treasuries, showing that the market fears inflation more than the uncertainty of war itself. This development is changing the behavior of the markets as a whole. Bonds no longer offer the same protection to portfolios, while volatility remains elevated.
The energy shock is the main catalyst for this change. The persistence of Brent near $100 and concerns about disruptions in flows from the Middle East bring back the 2022 scenario, but in a more complex environment. Europe is still an energy importer, which means that any increase in prices immediately passes into inflation. However, unlike 2022, today the economy does not start from a low price level, but from an already increased cost of living, due to previous inflationary pressures.
Analysts point out that oil prices remaining high for a prolonged period will lead to secondary effects, affecting not only the energy, but also services and wages. This is why markets remain so sensitive to developments.
The cost to the economy
Rising yields directly translate into higher borrowing costs for governments, banks, businesses and households. When the German 10-year bond is near 3%, the entire eurozone yield curve remains higher. This means that new government debt issues become more expensive, as do corporate bonds and bank lending.
In practice, this is passed on to the economy through higher interest rates on loans, mortgages and business financing. US mortgage rates above 6% are already a prime example of how the cost of money is passed on to households.
For Greece, the picture is more complex. On the one hand, the 10-year yield near 3,7% means that borrowing costs remain elevated and the environment less favorable. On the other hand, the country still has a significant liquidity cushion and a favorable debt structure, which limit immediate pressures.
Market participants point out that Greek bonds have shown relative resilience compared to the past, reflecting the country's improved credit profile. However, Greece is still on the periphery of the eurozone, which means it is directly affected by the general market sentiment.
From shock to persistent worry
The first days of the crisis were characterized by intense movements and sharp appreciations. Today, the picture has shifted. Markets are no longer moving in terms of panic, but in terms of adjustment.
The key question is not whether there will be a shock, but how long it will last. If energy prices remain high, markets will continue to adjust their interest rate expectations, keeping yields elevated.
The coming weeks will be crucial for the course of the markets. The key question is whether the energy shock will prove to be temporary or whether it will last. If oil prices remain above $100, markets will continue to revise their expectations for interest rates, leading to a further rise in yields. In this scenario, the ECB may find itself faced with the possibility of further tightening its policy. Conversely, a de-escalation in energy prices could stabilize markets and limit pressure.
