When the market hears bombs, it buys bonds.
Or at least that’s usually the case. This time, the market is weighing whether the war in Iran is inflationary due to the 4.5% rise in oil prices so far. Notably, the gains in the oil market have been halved since the open but yields are at the highs of the day.
US 10-year yields are up 1.3 bps to 3.975% after falling below the big figure late last week. You could argue there is some profit taking ongoing on a “sell the fact” trade but it’s still surprising to see yields higher.
Looking at the chart, yields are trying to bounce off the autumn lows.
The worry I have is that Iran is better-equipped to fight back than expected. There is also the semblance of a surprise strategy unfolding:
- They are attacking everyone
You would expect them to go after Israel and US bases. They’re certainly doing that but they’re also launching attacks on the Dubai airport and a UK base in Cyprus. The strategy may be to force the US and allies to spread out defenses but it also could be an effort at pressure:
If they close the airports in Dubai, Doha and Abu Dhabi along with creating chaos and fear in major cities in Gulf states, those countries could pressure the US and Israel to stop attacks. Alternatively, it could rally those countries to join the attack and cause a full-on Middle Eastern war (including on the ground)
