Aberdeen’s five things to know about bonds amid current geopolitical volatility

Amid the current geopolitical volatility, government bond yields have been rising alongside oil prices. Typically seen as a safe haven asset in times of market stress, bonds have defied this status in recent weeks, reflecting a shift in how investors are thinking about inflation, interest rates and risk.

Luke Hickmore, Investment Director – Fixed Income at Aberdeen Investments, says:

“The price of oil matters. It feeds directly into transport costs, heating bills and the price of moving goods around the economy. When oil prices rise sharply, inflation risks rise with them. Even if headline inflation had been easing before, higher energy costs put a floor under how far and how fast inflation can fall.

“Bond investors care deeply about that. Bonds pay a fixed income. If inflation turns out higher than expected, those payments lose purchasing power. The response is straightforward – investors demand a higher yield to compensate. When bond prices fall, yields rise.

“That dynamic has been clear in recent weeks. As oil prices have climbed on concerns around supply, markets have steadily marked up their inflation assumptions. In turn, bond yields have moved higher across major economies.”

Luke Hickmore’s five things to know about bond yields today

1. Why bonds have not behaved like a traditional safe haven

Higher oil prices raise the risk that inflation proves sticky, forcing policymakers to stay cautious even if growth slows. Markets that were previously comfortable pricing in rate cuts have had to reassess. Fewer cuts, or cuts pushed further out, naturally mean higher yields today.

This helps explain why bonds have not behaved like a traditional safe haven asset. In the past, geopolitical shocks often drove yields lower as investors rushed into government debt. This time is different. The shock is coming through energy prices and inflation, not through a collapse in demand. 

When inflation is the problem, bonds do not provide shelter.

2. What investors mean by a “premium” and why they’re rising

The word “premium” gets used a lot in markets, but the idea is simple. A premium is the extra return demanded for extra risk.

Think of it as an insurance charge. When the world looks calm and predictable, investors are willing to accept lower returns. When uncertainty rises, they want to be paid more to lend their money.

In today’s bond market, several premiums are rising at once. There is a higher inflation premium, reflecting the risk that oil keeps inflation elevated. There is also a higher term premium, reflecting uncertainty about where interest rates ultimately settle. And increasingly, there is a geopolitical risk premium layered on top.

None of these premiums are visible on a single line of a spreadsheet. But together, they push yields higher.

3. Geopolitics and the return of the risk premium

Geopolitics matters here not because investors are trying to predict the next headline, but because it widens the range of possible outcomes.

Conflicts in energy‑producing regions increase the risk of supply disruptions, shipping bottlenecks and sudden price spikes. Even if the worst outcomes are avoided, the probability of disruption rises. Markets price that uncertainty.

This is where the geopolitical risk premium comes in. Investors demand additional compensation for lending in a world where inflation shocks are more likely and policy responses are less predictable.

Crucially, this premium does not disappear just because markets have “calmed down” for a few days. It stays in place as long as the underlying risks remain unresolved. That is why yields can stay elevated even in the absence of fresh bad news.

4. Bond yields reflect uncomfortable truths

Put simply, higher oil prices have reminded markets of three uncomfortable truths.

First, inflation risks have not gone away. Second, central banks do not have unlimited freedom to cut rates if energy prices keep rising. Third, geopolitics carries a real economic cost that investors can’t ignore.

Bond yields are reflecting all three. Until oil prices stabilise and geopolitical risks recede, investors are likely to continue demanding a higher premium for holding bonds. That is not panic. It is rational pricing in a less predictable world.

5. Why this matters in the UK

In the UK, the economy remains sensitive to energy prices, and inflation has already proven harder to tame than many had hoped. Higher oil prices risk feeding back into transport costs, utility bills and broader services inflation just as households are starting to see some relief.

For the gilt market, this matters in two ways. First, higher inflation risk pushes up yields directly, as investors demand greater compensation for holding long‑dated government debt. Second, it complicates the Bank of England’s job. If energy prices are adding fresh inflation pressure, the Bank has less freedom to cut rates quickly, even if economic growth remains weak.

There is also a fiscal angle. Higher gilt yields feed through into higher borrowing costs for the government over time. That tightens the budget constraint and reduces room for manoeuvre elsewhere. In that sense, rising oil prices do not just affect motorists and energy bills, they show up in the cost of financing the state.