Bond market signals inflation worries

The yield on the 10-year Treasury note rose this week, as worries mount that a prolonged war in the Middle East could fuel inflation.

Why it matters: The 10-year note influences borrowing costs across the economy — from mortgages to business loans — and a sustained rise can make financing more expensive for households and businesses.

• It's also a bit of whiplash. Yields had just dipped below 4% last week, raising hopes of unlocking the frozen housing market and giving the White House a nifty talking point. They were above 4.1% yesterday.

The big picture: The culprit is mostly energy prices. The Iran war is causing a surge in oil and gas prices rippling through economies around the world.

• The U.S. is more protected from energy shocks, but it's not immune.

By the numbers: Just the recent price increase of Brent crude, the global oil benchmark, to around $80 a barrel, will boost inflation and slow growth for most countries, economists at Goldman Sachs wrote in a note yesterday.

• If the Strait of Hormuz closes for an extended period, and oil prices move to $100 a barrel, then inflation could rise even further.
• Central banks have historically not responded to oil price shocks, per Goldman, but they modestly tighten when either inflation is high or oil price shocks are large. (Or both, to those old enough to remember 2022.)

Zoom out: This is a global phenomenon. "The shock in oil and gas prices is changing the inflation arithmetic around the world," Rebecca Patterson, a senior fellow at the Council for Foreign Relations, tells Axios.

• "Central banks around the world who weren't planning on raising rates this year may find themselves in a very awkward position."

Zoom in: Three European Central Bank policymakers warned yesterday that euro-zone inflation would likely rise, and growth sag, if the war in Iran became drawn out, Reuters reported.

• "European short‑term bonds are now pricing in the chance of a rate hike — not a cut — showing just how quickly inflation fears have escalated," Christian Raute, head of markets trading strategy at Citi, tells Axios.

Reality check: The 10-year yield is still lower than even a month ago, and certainly since last year.

And in the U.S., war economics is just one part of the inflation equation, Joseph Brusuelas, chief economist at RSM, tells Axios.

• Investors are expecting a hot reading next week on personal consumption expenditures, the preferred inflation measure of the Federal Reserve.
• "I know that's not a sexy explanation of pricing dynamics, given what's happening in Iran."

What to watch: Everything hinges on how long this war goes on. The White House has given conflicting timeline estimates.

• With inflation expectations rising and an underwhelming job market, talk of "stagflation" is starting to bubble up. Strap in.