Treasuries suffer biggest selloff in nine months as Iran conflict drives inflation fears
Bond market defies typical safe-haven pattern as geopolitical tensions fuel oil price surge and Fed rate cut expectations
U.S. Treasury bonds headed for their biggest selloff in nine months on Monday as the escalating conflict between the United States, Israel, and Iran triggered an unusual reversal in traditional safe-haven flows. The move defies typical market behavior during periods of geopolitical crisis, when investors usually flock to government debt for protection.
The 10-year U.S. Treasury note yield climbed to 4.06%, an increase of 11 basis points from the previous session, after briefly dipping below 4% last week. At one point, the benchmark yield surged to 4.07%. The 2-year yield traded around 3.42-3.47%, while the 30-year yield stood at approximately 4.6-4.68%, according to multiple market data sources.
The bond selloff comes as the Iran conflict, now in its third day, intensifies with U.S. and Israeli military strikes followed by Iranian retaliation. The death of Iran's Supreme Leader Ali Khamenei in the initial strikes has further escalated tensions, raising concerns about potential disruptions to Middle Eastern oil supply, particularly through the Strait of Hormuz.
Oil prices have surged in response to the crisis, with Brent crude rising 8-11% to around $79 and WTI crude climbing 6-8% to approximately $71.40-$72. The energy price spike has reignited fears of renewed inflationary pressures, which analysts say is driving investors away from Treasuries rather than toward them.
"The bond market selloff was primarily driven by investor concerns that soaring energy prices would exacerbate inflation, thereby limiting the Federal Reserve's ability to implement further interest rate cuts," according to market analysis from MPA Magazine. The selloff reversed a strong rally in Treasuries that had characterized trading throughout February.
The unusual market reaction highlights a complex interplay between geopolitical conflict, surging commodity prices, and inflation expectations. While traditional safe-haven assets such as gold rose more than 2% to trade around $5,370-$5,400 per ounce and the U.S. Dollar Index climbed to a five-week high, Treasuries failed to attract the usual defensive bid.
Market analysts note that the dynamics reflect growing investor skepticism about the Federal Reserve's path forward. With inflation potentially reigniting from higher energy costs, expectations for additional rate cuts are being tempered, putting upward pressure on yields across the Treasury curve. The situation presents a particular challenge for equity valuations, which face headwinds from both elevated bond yields and geopolitical uncertainty.
Japanese government bonds provided a contrast, with the benchmark 10-year JGB yield dropping as investors sought alternative safe havens. Even Bitcoin, often considered a digital safe haven, saw gains of 1.7% during the session.
The Treasury selloff marks a significant shift from the bond market's behavior in previous geopolitical crises, suggesting that investors are now more focused on the inflationary implications of Middle Eastern tensions than on traditional flight-to-safety dynamics. As the conflict continues to unfold, market participants will be watching for any signs of escalation that could further disrupt oil supplies and prolong the period of elevated inflation expectations.