The immense pressure of the war in Iran is poking out in some strange corners of the financial markets, such as Korean stocks and Romanian debt. Every asset class and commodity is taking some kind of strain.
It is hard, in that environment, to pick the market moves that really matter. This week’s wild ride in UK government bonds is, I think, one of them. It is an early warning sign of how a commodity shock, in oil and gas, can morph into a bond shock that hurts government finances far and wide and jacks up borrowing costs for us all.
UK and European government bonds have been the rather unlucky financial-market victims of the bombing of Iran from the start. A lot of very similar, very crowded bets among hedge funds, all anticipating further declines in interest rates, hit a wall as the abrupt rise in oil prices awoke inflation from what had appeared to be a nice nap. The unwind turned a modest drop in bond prices into a pretty large drop in bond prices and left the gilet brigade with egg on their faces.