The Bond Market Is Collapsing, Signaling the "Next Phase" of the Iran War

In the context of deadlocked peace negotiations over the Iran war, an urgent issue is emerging for the U.S. market: the bond market is collapsing. Amid the bond market crash, we believe the “intervention” possibility is increasing. What does all this mean? Let us explain.

⚠️ Before we begin, mark this article—it will serve as your guide in the coming weeks on the market. When the Iran war started on February 28 with the assassination of Iran’s Supreme Leader, Khamenei, carried out by the U.S. and Israel, the oil market initially only rose by less than 15%. The U.S. assumed that the assassination of Khamenei would lead to a quick “takeover and regime change” in Iran, resulting in a relatively swift outcome with minimal disruption. So far, the Iran war has entered its 27th day, the U.S. “15-point peace plan” has been rejected by Iran, and peace negotiations seem to be at a dead end. It’s still unclear if either side truly wants to end the war. Therefore, oil prices remain high, with WTI crude approaching the $100 per barrel mark, but this is no longer the biggest issue for the market. The biggest concern now is the bond market, which is rapidly becoming the greatest obstacle to the global economy. The Major Issue: In the early days of the Iran war, oil prices received the most attention, and this largely remains true today. Why? Because the oil market has shown the most direct and immediate impacts of the Iran conflict. However, a much bigger problem now is the sudden surge in U.S. Treasury yields. As shown below, the yield on the 10-year U.S. Treasury bond has risen from about 3.92% to 4.42% in 27 days since the Iran war began, an increase of 50 basis points. It’s important to note that before the Iran conflict erupted, there was discussion about how many times the market would cut interest rates in 2026. The current pace of the 10-year U.S. Treasury yield increase, and U.S. Treasury yields in general, aligns with what we saw in April 2025, during Liberation Day. However, this time, the context is much more complex, and suppressing the bond market is not as simple as it appears. This will soon become the biggest story in the market. From Rate Cuts to Rate Hikes To better understand, let’s look back at the interest rate expectations at the end of 2025 to see the significant change we are witnessing now. As shown below, the market predicted the Federal Funds Rate would fall to 2.75%–3.00% in the baseline scenario for 2026. There’s even over a 25% chance that rates will fall below that level. Now, let’s see what the future interest rate outlook looks like. The baseline scenario indicates rates will stay unchanged from current levels until September 2027, with the Federal Funds Rate expected to be in the target range of 3.50%–3.75%. This figure is 75–100 basis points higher than expectations just a few months ago, and this forecast extends to the end of 2027. In fact, discussions about raising interest rates are back on the table, with about a 43% chance that the Federal Reserve will hike rates by the end of 2026. Objectively, the market cannot endure this storm much longer. Next, we will explain why. The U.S. Labor Market Is Getting Worse On September 17, 2025, the Federal Reserve approved a rate cut that many anticipated, signaling two more cuts before year’s end amid growing concerns about the U.S. labor market, even as inflation remains well above the Fed’s long-term 2.00% target. In the post-meeting statement, the committee described economic activity as “slowing,” but also added that “job growth has slowed” and noted that inflation “has increased and remains quite high.” Lower job growth and higher inflation conflict with the Fed’s two main goals: price stability and maximum employment, but the labor market is a more significant issue. To date, the labor market situation has only worsened. In fact, the market is now in a worse position than in September 2025 when rates increased. The facts are as follows: First, U.S. employment data has been revised downward by -1,029,000 jobs in 2025, the largest annual revision in at least 20 years. This follows downward revisions of -818,000 jobs in 2024 and -306,000 in 2023. In total, -2,153,000 jobs have been removed from the initial reported data over the past three years. Since 2019, -2,500,000 jobs have been erased from official data, with downward revisions occurring in 6 of the last 7 years. This is just one example, and there are countless others. The average duration of unemployment in the U.S. increased by 2 weeks in February, reaching 25.7 weeks—the highest in four years. Unemployment duration has increased by 6.3 weeks since October 2023, the fastest pace since 2020–2021. This figure is now much higher than pre-pandemic levels of 2018–2019. Again, there are numerous examples of persistent and increasing weakness we are witnessing in the labor market. In our view, the U.S. economy cannot withstand a 10-year yield near 4.50%, let alone above 5.00%. Why Is This Happening? Overall, the surge in U.S. Treasury yields and the decline in rate cut expectations stem from a key concept: inflation. The dual mandate of the Federal Reserve, established by Congress in 1977, directs the central bank to use monetary policy to achieve two main economic goals: maximum employment and price stability. As we mentioned, when the Fed resumed rate cuts in 2025, the Federal Open Market Committee (FOMC) considered labor market weakness “more important” than high inflation. However, as energy prices spiked, the Iran war dragged on, and the energy recovery from Iran slowed, inflation became the primary concern—not because the labor market strengthened, but because inflation worsened. As outlined above, the 12-month inflation expectation in the U.S. surged to 5.2%, the highest since March 2023. Interestingly, the shift in expectations began in early January and accelerated rapidly when President Trump threatened Iran, concentrated forces in the Middle East, and ultimately attacked Iran on February 28. This brings us back to the chart below, reflecting our CPI inflation model. As we wrote when the war started, we believe that an average oil price of $95 per barrel over three months will push U.S. CPI inflation to 3.2%. However, the reality is that inflation could rise above 3.2% due to various indirect effects of what is happening now. We Believe Intervention Is Imminent During the tumultuous period of the early 2025 trade war, a final key factor led to President Trump’s decision to temporarily halt tariffs for 90 days in April 2025: the bond market. In the chart below, we outline the exact timing of the Treasury bond yield spike during the “Liberation Day” period under President Trump, which ultimately led to the pause on April 9, helping to ease the surge. On April 10, President Trump stated in a live interview that he was watching the bond market closely. Since then, it has become increasingly clear that the 4.50%–4.70% range on the 10-year Treasury is the “policy switch zone” for President Trump, as we call it. This level is slightly above the current, and we generally agree that intervention is necessary to avoid a major recession in the U.S. economy if rates reach this level. In our view, this time is no different. In fact, we believe that the moment President Trump announced “peace negotiations” on March 23 was no coincidence, as outlined below. At 4:30 a.m. ET on March 23, we observed that the bond market was “more collapsed” than the energy market. Just two hours later, when the 10-year yield hit 4.45%, President Trump probably had a similar conversation to April 9, 2025, when he paused tariffs for 90 days. An hour later, Trump delayed all attacks on Iran’s power plants for five days and announced that the U.S. and Iran had “effective” negotiations to end the war. This could be the first sign of intervention. What Should You Do Now? The most common question we receive is, what does all this mean? Overall, we want to emphasize that the Trump administration is very attentive to volatility in the stock, commodity, and bond markets. This is great for investors; President Trump DOES NOT want markets to decline, and he has shown he cares about this much more than previous administrations. This is why oil prices were relatively restrained after the initial spike. Oil investors know that President Trump will intervene immediately if U.S. oil prices spike back to $120 per barrel, as seen in the early days of the war. More broadly, we believe that stock market weakness will accelerate as the 10-year Treasury yield rises, but the upcoming “intervention” when it approaches our 4.50%–4.70% zone will curb the stock market’s decline. Additionally, President Trump, the Federal Reserve, and the Trump administration all know that the U.S. labor market cannot sustain high interest rates for long, which further suggests that a “long-term war” with Iran is unlikely to happen, and the issue could be resolved within weeks rather than months. Through our premium services and analysis, we aim to guide subscribers through this volatile period. If you’re interested in receiving our premium insights, you can do so by subscribing to our service here. Finally, amid the current turbulence and noise, we want to emphasize that the AI revolution has only just begun to accelerate. The AI stocks that led the market’s historic rally since 2022 are now selling off more and growing faster. Our long-term outlook for the stock market and the AI revolution remains unchanged. Stay tuned for the bond market developments. What we are witnessing is not just volatility but a shift in what truly matters. For weeks, the market has focused on oil prices, war news, and geopolitical tensions. But beneath the surface, a much larger force is emerging, and it is now beginning to take control. The bond market is now guiding the path of stocks, commodities, and ultimately, policy. And, as we have seen time and again, when financial conditions tighten too quickly, intervention is not a question of if but when.