To The Moon

Tensions between the US and Iran entered their third day, prompting investors to sell off US Treasury bonds and driving yields significantly higher. As oil prices surged and Middle East tensions escalated, fueling concerns about a resurgence of inflation, the safe-haven appeal of bonds temporarily weakened. On Monday, the yield on the 10-year US Treasury note rose by 9 basis points to 4.051%, marking its largest single-day increase since early June of last year. Bond prices move inversely to yields. A rapid rise in yields often impacts Wall Street negatively, potentially weighing on stock markets and increasing borrowing costs for both businesses and households. Harley Bassman, Managing Director at Simplify Asset Management, noted that war inherently has inflationary characteristics, stating, "You buy a missile, it explodes and is gone; it's essentially burning money." However, he emphasized that the critical factor is the duration of the conflict. US President Donald Trump stated on Monday that military action against Iran could last four to five weeks, or even longer, while also expressing a willingness to engage in dialogue with Iran's emerging leadership. This sell-off in US Treasuries follows a recent unexpected rally. Last week, amid sharp adjustments in the technology and software sectors, funds flowed into US bonds seeking safety, briefly pushing the 10-year yield below the key psychological level of 4% and helping drive the average 30-year mortgage rate below 6% for the first time since 2022. However, with oil prices soaring and inflation concerns rekindling, bond market sentiment quickly reversed. Previously released January Producer Price Index data showed the largest increase in wholesale goods and services costs in four months, and combined with rising risks to crude oil supply, added further uncertainty to the inflation outlook. On Monday, both Brent crude and WTI crude oil prices climbed to their highest levels since June of last year. Angelo Kourkafas, Global Investment Strategist at Edward Jones, commented that the recent spike in oil prices delivers a certain inflationary shock. Markets are also monitoring shifts in economic momentum. Recent data suggests the US economy may be re-accelerating, with small-cap stocks outperforming large-cap stocks this year. Nevertheless, concerns persist that artificial intelligence could disrupt the software industry and create pressure on white-collar employment. US Treasuries had recently served as a "safe haven," but current geopolitical and energy price volatility is undermining that role. The ICE BofA MOVE Index, which gauges interest rate volatility expectations, had already risen to a yearly high prior to the weekend's attacks, indicating unease in the bond market was evident even before recent events. Analysts believe that geopolitically-driven oil price increases might be viewed by the Federal Reserve as temporary factors, but they will likely add complexity to interest rate cut decisions in the short term. US stock markets showed mixed performance on Monday; the Dow Jones Industrial Average closed slightly lower, the S&P 500 was largely flat, and the Nasdaq Composite rose 0.36%. Software stocks, which had previously suffered heavy losses, rebounded, and high-yield bond ETFs stabilized. Some investors are betting that the conflict could ease within weeks, but other market participants warn that risk scenarios could still escalate if Gulf nations become involved or if the Strait of Hormuz faces prolonged disruption.