Bond traders have abandoned expectations for Federal Reserve interest rate cuts this year and have even begun hedging against potential hikes, as ongoing Middle East conflicts continue to drive up energy prices. Meanwhile, the European Central Bank has warned that under an extreme scenario, inflation could rise to 6.3% by 2027. Gold prices have continued their decline, pressured by rising interest rate expectations and a strengthening US dollar.
The rapid evaporation of rate cut expectations represents one of the most significant shifts in current market sentiment. Following hawkish statements from the Bank of England indicating readiness to combat inflation, investors widely believe that major global central banks will prioritize fighting inflation over supporting economic growth.
US and European bond yields have moved higher across the board. The policy-sensitive 2-year US Treasury yield rose to 3.89%, indicating that markets have largely eliminated the possibility of Fed rate cuts this year. Some traders have even begun pricing in the risk of rate hikes in the coming months.
Market participants note that the current bond market sell-off is primarily driven by capital outflows and a lack of buying interest. As the US-Israel conflict with Iran continues to escalate, with expectations that hostilities could persist for months or longer, the pass-through effect of rising energy prices on inflation is being repriced.
Concurrently, the US labor market remains robust, with the latest initial jobless claims unexpectedly declining, further reducing the urgency for the Fed to support the economy through rate cuts.
In Europe, expectations for upside inflation risks have also become more pronounced. The European Central Bank's latest economic projections indicate that under an extreme scenario—where energy supplies face severe disruptions and conflict persists through the end of 2026—eurozone inflation could climb to 6.3% in the first quarter of 2027, accompanied by a brief economic recession. Even under the baseline scenario, eurozone inflation this year is still projected at 2.6%.
ECB President Christine Lagarde stated that inflation risks are clearly tilted to the upside, while economic growth faces downward pressure. Markets have begun pricing in at least two ECB rate hikes by 2026 to counter inflation.
Against the backdrop of this significant adjustment in interest rate expectations, the gold market has faced notable pressure. Rising oil prices have fueled inflation expectations, while the elimination of Fed rate cut bets has reduced the appeal of gold as a non-yielding asset. Since the outbreak of Middle East conflicts, gold prices have fallen approximately 13%, declining for multiple consecutive sessions.
Additionally, the US dollar has strengthened due to safe-haven demand, rising about 2% since late February, further pressuring dollar-denominated gold prices. Gold mining stocks have also come under pressure. The NYSE Arca Gold Miners Index fell as much as 10%, hitting its lowest level since December of last year. The sector had experienced significant gains in 2025, but as market conditions reversed, capital began flowing out.
Analysts point out that the market is currently facing a dual challenge of falling gold prices and rising energy costs, which could squeeze profit margins for mining companies. However, some institutions believe that if oil prices stabilize and pressure from interest rates and the US dollar eases, gold and related assets still possess rebound potential. Major mining companies, having benefited from substantial gold price increases in recent years, maintain relatively healthy balance sheets and may demonstrate some resilience under pressure.