Market News

(Bloomberg) -- The world’s most important central banks will potentially hand investors fresh reasons to sell government bonds this week as policymakers find themselves forced to confront the risk of a war-driven inflation shock.

The Federal Reserve, European Central Bank and peers in Japan, the UK and Canada are all scheduled to set interest rates. That makes for a rare week in which every Group of Seven central bank convenes, together deciding monetary policy for about half the world’s economy.

While investors expect them to all leave rates unchanged, markets will be alert to signs officials, including Fed Chair Jerome Powell and ECB President Christine Lagarde, are worried about the inflation threat posed by the biggest disruption to oil supply in history stemming from the US-Iran conflict.

Indications of concern and speculation that means tight or even tighter policy in coming months would likely be negative for government debt, which has already underperformed other assets in recent weeks as stocks and credit markets rallied with traders looking past the war.

With the Bank of Japan meeting on Tuesday, the Fed and Bank of Canada on Wednesday and the ECB and Bank of England on Thursday, Amy Xie Patrick is among the investors bracing for a busy week. She helps run a dynamic income strategy at Pendal Group that’s beaten 91% of peers in the past five years.

“What have central bankers got to lose sounding hawkish now?” said Xie Patrick, who has exited all her duration exposure this month. “There’s the oil shock. There’s the uncertain picture of inflation. Bonds want to follow the reversal we’ve seen in equities, but yields are so stuck” until there’s further clarity.

Although some major assets have re-priced to pre-war levels or even higher, shorter-dated yields from the US to the UK remain elevated.

Traders looking to profit from bond volatility have also been left largely disappointed. Yields on one- to three-year government notes have averaged a daily change of about two basis points so far this month, down from four basis points in March.

This could potentially change next week, said Stephen Miller, the former head of fixed-income at BlackRock Inc. in Australia.

Central bankers are on guard for renewed price pressures, wary of repeating the “transitory” misstep of the pandemic when many were surprised by the stubbornness of inflation. That experience is likely to keep policymakers cautious, even as growth concerns mount.