After Israel’s military started extensive attacks against Iran in an attempt to curtail Tehran’s nuclear weapons capabilities and Iran responded by shooting missiles at Israel, the U.S. Treasury market took an unprecedented action on Friday.
With little indication of the more common actions taken by investors to increase exposure to the safe haven asset when geopolitical tensions flare up, the benchmark 10-year Treasury yield BX:TMUBMUSD10Y increased 6.5 basis points to 4.423% on Friday.
Mohamed El-Erian, chief economic adviser at Allianz, told CNBC Friday morning that “the world is losing confidence in the sovereign side of the U.S.” “If you are looking for safe-haven flows, you won’t find them in the Treasury market.”
The selloff in Treasurys could also have been caused by investors seeking clarification on whether these strikes, like other recent military operations between Iran and Israel, would quickly de-escalate.
While some haven flows were seen in the Treasury market overnight as the attacks played out, yields remained higher on Friday, according to Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. “It’s a bit of a head scratcher for sure,” Goldberg said.
According to Goldberg, “a rise in oil and commodity prices really exacerbates any stagflationary shocks,” and investors might be pricing in a larger likelihood of that risk materializing.
When an economy struggles but inflation stays high, it’s known as stagflation. This can be a risky situation for financial assets since it leaves central banks fighting inflation with limited leeway to lower interest rates in an effort to boost growth.
Some traders may be staying away from the market due of the Federal Reserve’s two-day policy meeting and its rates decision scheduled for Wednesday, Goldberg said, particularly in light of the robust rally in Treasurys prior to Friday’s selloff.
According to Dow Jones Market Data, the 10-year yield fell 15 basis points to 4.357% over the week ending Thursday, marking the largest four-day yield decrease since late April. Yields and bond prices move against each other.
Aside from the Middle East crisis, bond investors were also paying attention to the uncertainties around tariffs, indications of a weakening labor market, and the Senate’s sluggish movement on the Republicans’ massive tax and spending bill, according to Roger Hallam, global head of rates at Vanguard.
Since the April 2 tariffs, there have been worries about a “buyers strike” in the Treasury market, but Hallam said that this week’s increased supply through auctions had gone smoothly. “That concern has been put to bed – at least for now,” stated the politician.
While Treasurys were selling off on Friday, gold (GC00) and the dollar DXY were rising, suggesting a more general shift, according to Guy LeBas, chief fixed income analyst at Janney Montgomery Scott.
“That shift underscores the changing nature of [U.S. Treasurys] in a world in which the US appears to be pulling back from some of its global role and in a world which is concerned about the volume of Treasury supply,” he said in an email to MarketWatch.
But Goldberg said he expects Treasury demand to increase if the Iran-Israel crisis intensifies.
“If this were to unfortunately turn into a broader geopolitical conflict, I think the Treasury market would trade very much like a safe haven,” he stated.
