Selling pressure on 10-year US Treasuries from the latest round of Israel-Iran conflict is likely to have a lasting effect if past episodes of clashes between the two nations are any guide.
Benchmark Treasury yields rose nine basis points since tensions between Israel and Iran turned into a direct conflict on Friday, as a surge in oil prices fanned inflation concern. Before that, Iran’s direct strikes in April 2024 and another flare-up between the two nations in October had also pushed up Treasury yields rapidly and kept them elevated over a 30-day period, Bloomberg analysis showed.
“The market is quite volatile, with investors gravitating toward safe-haven assets and driving up crude prices,” said Carlos Casanova, senior Asia economist at Union Bancaire Privee in Hong Kong. This is likely to result in an increase in 10-year US yields.
The developments add to risks for Treasury investors who are already confronting worsening inflation worries from President Donald Trump’s trade war and spiraling debt concern in the US. Traders demanding a higher premium for the risk of lending to governments are likely to propel yields higher with tensions in the Middle East impacting energy prices.
US yields have risen across the board, but gains have been relatively less in shorter tenors, which has steepened the curve. Two-year yields in the US have risen eight basis points since Thursday’s close.
“Steepening pressures on the Treasury curve could continue,” said Wei Liang Chang, Singapore-based macro strategist at DBS Group Holdings Ltd. “Investors may weigh a rise in military expenditure over the longer term due to a more uncertain geopolitical environment, and risks of inflation turning sticky if oil prices are to stay elevated.”
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