By Finbarr Flynn and Ruth Carson

(Bloomberg) -- The specter of stagflation caused by the Iran war has wiped out more than $2.5 trillion from the value of global bonds in March, on track for the biggest monthly loss in more than three years.

Bonds are tumbling as a surge in oil prices quickens inflation, which erodes the value of the fixed payments from debt. While the slide in bonds’ market value is less than the roughly $11.5 trillion lost in global equities, it’s perhaps more unexpected as debt typically gains in times of geopolitical turmoil.

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“Markets are beginning to price what I think is going to be a stagflationary impulse manifested very soon,” Kathryn Rooney Vera, chief market strategist at StoneX Group Inc., said in an interview on Bloomberg Television. “The longer this goes on, the higher oil prices can rise.”

The total market value of government, corporate and securitized debt has fallen to $74.4 trillion from almost $77 trillion at the end of February, based on a Bloomberg index. That’s on course to be the biggest drop since September 2022, when the Federal Reserve was in the midst of an aggressive cycle of interest-rate hikes. In percentage terms, the gauge has slipped 3.1% this month.

Government debt has led declines, with a Bloomberg index of sovereign securities sliding 3.3% in March, while corporate bonds have fallen 3.1%, the data show.

US Treasury yields have climbed to their highest levels in months after a third straight week of bond losses on speculation the Fed will be compelled to hike rates to combat inflation. In Asia, government bond yields in India, Japan and South Korea have climbed.

Australia’s 10-year yields rose to the highest level since 2011 on Monday, while those in New Zealand are at the highest since May 2024.

WATCH: A selloff in stocks, gold and bonds deepened as the US and Iran hardened their rhetoric and signaled a potential escalation to their conflict in the Middle East. Mark Cudmore breaks down the situation.Source: Bloomberg