World bond yields fall as concern over Ukraine mounts

Bond yields have fallen and sharemarkets have weakened as the war in the Ukraine worsens. Photo / Flie

Bond yields dropped sharply overnight as the war in Ukraine cast doubt on expectations about the speed with which monetary conditions will have to tighten to offset rising inflation around the world.

Stock markets also fell sharply and the local S&P/NZX50 sharemarket index dropped 33 points to 12,166 after a strong gain yesterday.

New Zealand bond yields joined the global trend with 10-year Government bonds dropping by 8 basis points to 2.68 per cent, the five-year bonds by 7 basis points to 2.578 per cent and the two-year bonds also by 7 basis points to 2.29 per cent.

Wall Street's blue-chip S&P 500 index lost 1.5 per cent, dragged lower by financial stocks, which were on track for their worst day since June 2020.

The technology-heavy Nasdaq Composite fell 1.3 per cent, having closed 0.4 per cent higher in the previous session.

Government bond prices rose significantly both in the eurozone and the US.

Bonds - particularly US Treasuries - are heavily sought in times of extreme uncertainty because of their safe-haven status. When bond prices rally, yields fall.

Harbour Asset Management portfolio manager Shane Solly said investors' risk appetite had taken a dive overnight with oil prices surging by 9.5 per cent to US$104.80 a barrel, despite the release of more oil from America's strategic reserve.

While military action and higher oil prices are bad for economic growth, lower bond yields may support valuations of New Zealand defensive and long-term structural growth stocks, he said.

Westpac senior market strategist Imre Speizer said bond markets had turned "skittish" on the Ukraine conflict.

"It's ambiguous because the Ukraine situation is exacerbating these inflationary pressures and last night was a classic for commodities - both hard and soft commodities.

"With higher commodities prices feeding inflation, central banks are going to struggle to 'look through' that like they would normally do, because you already have these high inflation expectations," he said.

"High commodities prices will ratchet them up even further, which would normally be positive for interest rates.

"However, on the other side of the coin it could be that if the Ukraine war continues, the speed of tightening might have to slow down in the near term and then perhaps speed up later on," he said.

"That seems to be the thinking."

Harbour's Solly said markets were moderating their expectations of how aggressive the US Federal Reserve would be with its rate tightening plans.

"It's a tough job for central banks at the moment. On one side they have to address high inflation but on the other they have the risk of economic growth tailing off quite quickly," he said.