Falling Every Day Amid Middle East Conflict! An Article Explains: Why Are U.S. Treasuries Worse Than Risk Assets?

Cailian Press, March 5 (Editor: Xiaoxiang) Under Middle Eastern conflict, traditional safe-haven assets like U.S. Treasuries seem to be performing worse than risk assets such as stocks…

Market data shows that while U.S. stocks rebounded strongly on Wednesday, the wave of selling in U.S. bonds continued— the 10-year U.S. Treasury yield, known as the “global asset pricing anchor,” rose for the third consecutive trading day, closing up 3.65 basis points at 4.096%. Bond yields move inversely to prices.

From the trend this week, the U.S. and Israel’s attacks on Iran have nearly ended the weeks-long rally in U.S. Treasuries and pushed the 10-year yield back above 4%, which could increase borrowing costs for companies and consumers in the future.

Although similar geopolitical conflicts in the past often triggered stock market volatility and prompted investors to seek safety in bonds, this time, the safe-haven appeal of U.S. bonds appears noticeably diminished.

Many bond traders say this is mainly because the Middle Eastern conflict has also driven up energy prices. Currently, the impact of rising energy prices on investors is more critical, which heightens concerns about inflation returning and consequently weighs on bond prices.

This wave of U.S. Treasury selling has disappointed many, as yields seemed poised to break below recent trading ranges. The 10-year yield significantly influences borrowing costs across the economy; its decline in February helped bring the 30-year mortgage rate down to its lowest in over three years—below 6%.

Zach Griffiths, head of investment-grade bonds and macro strategies at CreditSights, noted, “The market is now re-emphasizing the long-term impact of inflation, and the typical safe-haven capital flows are weakening.”

Inflation Threats Loom Over the Bond Market

For investors, the biggest threat of inflation is that it will force the Federal Reserve to raise short-term interest rates or at least not cut rates as expected. Rising rates will make alternative investments like money market funds more attractive, weakening the value of medium- and long-term U.S. Treasuries.

Currently, the sharp rise in oil and gas prices is likely to push up overall inflation indices. Since last weekend’s attack on Iran, international crude oil prices have risen about 12%, reaching levels not seen since June last year.

While Fed officials typically focus on core inflation, which excludes volatile food and energy prices, significant energy price shocks are a different matter. Such shocks often transmit to other goods prices and lead businesses and consumers to expect sustained inflation over the coming years—economists warn this could become a self-fulfilling prophecy.

In fact, this week’s Middle Eastern conflict has already increased some market inflation expectations. The spread between the five-year nominal Treasury yield and the five-year TIPS yield—known as the “breakeven inflation rate”—has risen from 2.46% last Friday to over 2.5%.

Meanwhile, investors have also lowered expectations for the Fed to cut rates this year, with the probability of two rate cuts dropping from 79% last Friday to about 55%, according to federal funds futures.

Even before the latest inflation risks emerged, the Fed was already under pressure from its most closely watched inflation indicator—the core PCE price index. Based on January consumer and wholesale prices, the January core PCE index is expected to see its largest month-over-month increase in over a year when released next week.

It’s worth noting that in the past, when faced with new dual threats, U.S. Treasuries have sometimes moved decisively in one direction and then completely reversed. A clear example was in April last year, after Trump announced tariffs—initially, Treasuries rose, then sharply declined.

Some investors still remain optimistic about U.S. Treasuries.

John Madziyire, head of U.S. Treasuries at Vanguard, said his baseline expectation is that as the impact of tariffs diminishes and inflation eases, the Fed will restart rate cuts in the second half of the year, pushing long-term yields to test lower levels.

He also noted that if the ongoing Iran conflict continues to push energy prices higher, it could hinder rate cuts but also slow economic growth, prompting investors to seek safety in long-term Treasuries again. “Current yields are quite attractive, and volatility will create more opportunities for us,” he said.