The bond market has stopped dreaming of rescue. A few weeks ago, investors were still clinging to the idea that the Federal Reserve would ride to the rescue with a sequence of rate cuts, smoothing over the cracks in growth and shielding markets from the first economic tremors of the war in the Middle East. That illusion is now fading. The latest employment figures in the United States, firmer than expected, have reinforced what markets had already begun to understand: the Fed is in no position to ease quickly, and may spend the rest of the year doing little more than watching the damage spread. March payrolls surprised on the upside. Job creation rebounded to 178,000, unemployment edged down, and the labour market looked steadier than many had feared. Wage growth, it is true, softened somewhat, and revisions to earlier data painted a less flattering picture beneath the surface. But the broad message remained clear enough: the US economy has not yet weakened enough to force the Fed’s hand.

And that matters because the inflation threat has returned with force. The oil shock created by the war has already pushed petrol prices sharply higher. The immediate effect is now feeding directly into inflation expectations. Markets are beginning to accept that the next CPI print could show the strongest monthly increase since 2022. The core picture is less dramatic, but that hardly changes the larger problem. Inflation was already proving stubborn before the war. Now it has acquired an external accelerant. The result is a Federal Reserve trapped in an increasingly uncomfortable position. Growth risks are rising, but inflation risks are rising faster. In such an environment, cutting rates becomes politically difficult and intellectually indefensible. The market has understood this. Traders ended the week largely pricing a Fed that stays on hold this year, with even 2027 easing expectations pushed lower. This is not a hawkish conviction. It is paralysis in a more polished suit.

Treasuries reflected that shift. Yields rose after the jobs report, though not violently. The two-year note, the part of the curve most sensitive to Fed expectations, moved higher. Yet the more revealing point is not the daily move, but the broader change in tone. The market is no longer obsessing over imminent rate cuts, nor does it really believe in aggressive tightening. It is drifting towards a more defensive, more neutral posture, caught between short-term inflation and weaker medium-term growth. That is the real significance of recent market pricing. For now, short-dated yields remain elevated because the labour market has not cracked and energy prices are still feeding inflation fears. But further out along the curve, another anxiety is beginning to emerge: fiscal risk, structural deficits, and the possibility that long-term borrowing costs remain stubbornly high even if growth weakens. In other words, the old comforting assumption — that a slowdown would automatically bring lower yields — is no longer as reliable as it once was.

And this matters far beyond the United States. Across the world, central banks are being pulled into the same tightening trap, even without formally tightening. In Asia, policymakers from India to South Korea are being forced into caution. Growth is already fragile, but imported inflation — driven by energy and currency pressure — leaves little room to ease. In Europe, the dilemma is more insidious. Weak growth would normally justify rate cuts, yet energy inflation, once again imported, constrains the European Central Bank. Cutting too early risks reigniting price instability just as credibility is being rebuilt. In Latin America, where several central banks had begun easing cycles, the shock forces a pause, if not a reversal, as inflation expectations drift upward again. This is how a regional war becomes a global monetary constraint. Not through synchronised tightening, but through synchronised hesitation. Central banks are no longer leading the cycle. They are reacting to a supply shock they cannot control. Oil has effectively set a floor under global inflation and, by extension, under interest rates. The consequence is subtle but powerful: rates remain higher for longer, not because economies are strong, but because they cannot afford to be weak and inflationary at the same time. This is the worst combination for monetary policy. The result is a fragmented global landscape. Some economies will hold. Others will be forced to tighten defensively. A few may attempt to ease, but at the risk of destabilising their currencies. The coherence of the previous cycle — where central banks moved broadly together — is breaking down. In its place emerges a more unstable regime, where policy paths diverge, but constraints remain shared. And markets, for once, are not ahead of the curve. They are adjusting to it, slowly, reluctantly, and without conviction. That is the real message behind the latest moves. The Fed is not easing. Not because it does not want to, but because it cannot. And neither, increasingly, can anyone else.