Government bonds rose as investors piled into haven assets to ride out the market fallout from unprecedented sanctions imposed on Russia by the U.S. and its allies over the weekend.

Short-dated tenors led the advance, with the yield on two-year U.S. Treasuries dropping as much as 11 basis points, followed closely German and U.K paper. Concerns are growing that decision to freeze the Russian central bank’s assets and exclude some of the nation’s biggest lenders from critical international payment systems may increase stress in global funding markets.

The gains come even as the crisis spurred by Russia’s invasion of Ukraine threatens disrupt the supply of oil, natural gas and other key commodities, further fanning record high inflation expectations. Longer-dated bonds underperformed.

“The dramatic escalation of sanctions and of geopolitical tensions makes hitherto unappealing government bonds a more compelling choice,” Antoine Bouvet, a strategist at ING Bank NV wrote in a note to clients.

The moves also suggests markets are beginning to reassess the pace at which central banks will remove some of the emergency stimulus injected to keep their economies afloat during the pandemic. Signs of a shift from the European Central Bank came last week, when officials said Russia’s invasion may delay the bank’s decision to exit stimulus this year.

“Market jitters may well result in central bankers striking a more cautious tone, something the ECB has already done, and a hymn sheet Powell will probably sing from at his congress testimony,” Bouvet said, referring to Federal Reserve Chairman Jerome Powell’s address to the Senate on Thursday.

Treasuries are off to their worst start to any year in four decades as investors took cues from the Fed’s hawkish pivot in January and hot inflation data to price in an aggressive pace of rate hikes. Traders have started trimming those back now, putting the odds of half-percentage-point increase from the Federal Reserve next month to just 10%, down from as much as 40% last Wednesday.

At the same time, the gap between two- and 10-year Treasury yields narrowed last week to levels last seen in March 2020, a sign expectations of an economic slowdown are now building as the central bank prepares to unwind stimulus.

“This Russian shock could not have happened at a worse time,” said Rob Subbaraman, head of global markets research at Nomura Holdings Inc. “It will lead to greater monetary policy divergence, in particular, U.S. monetary policy tightening moving much faster than most other G-10 central banks.”

The yield on 10-year Treasuries dropped as much as eighth basis points to 1.89% before paring the move. The yield on equivalent German paper was down 3 basis points to 0.2%. Swaps traders expect the Fed will deliver five rate hikes by year-end and see strong chances of six, taking the target rate 1.5 percentage points.

“From a monetary policy perspective, this conflict implies a further deterioration of the already tricky growth-inflation trade-offs central banks have been facing,” Silvia Dall’Angelo, senior economist at Federated Hermes, said in a note. “It is fair to say that the crisis increases the room for central banks’ policy mistakes.”

—With assistance from Ruth Carson, James Hirai, Enda Curran, Ken McCallum and Reinie Booysen.

This article was provided by Bloomberg News.