The worst Treasury bond rout since the tariff chaos of 2024 is hammering investors, as an oil shock from the Iran war leaves few safe havens and fuels fears of a new inflationary wave that could force the Federal Reserve’s hand.
“It’s clear to me if this crisis lasts more than three or four months it becomes a systemic problem for the world,” Patrick Pouyanne, chief executive officer of TotalEnergies SE, said at the CERAWeek conference. “We cannot have 20% of the crude oil, which is exported globally, stranded.”
The synchronized sell-off has been brutal. The yield on the 10-year U.S. Treasury note jumped by almost 0.5 percentage points to 4.439%, while the policy-sensitive two-year yield climbed to 3.915%. The turmoil sent the iShares Core 60/40 Balanced Allocation ETF down 6.3% since fighting began, while Brent crude futures have surged 55% to $112 a barrel.
The core problem for investors is that the war is simultaneously threatening economic growth and stoking inflation, undermining the traditional inverse correlation between stocks and bonds. This stagflationary shock complicates the path for central banks and leaves investors wondering if a protracted conflict could push oil toward the $200 a barrel mark.
The conflict, which began in late February, caught many investors positioned for falling interest rates. Just before the war, markets were pricing in a nearly 80% chance of two Fed rate cuts by year-end. That sentiment evaporated as the closure of the Strait of Hormuz—a chokepoint for about a fifth of global oil and gas supply—sent energy prices soaring.
While a flight-to-safety initially boosted bonds, the rally reversed within an hour as the inflationary implications of the oil shock took hold. Fed Chair Jerome Powell acknowledged the challenge in a March 18 press conference, suggesting officials couldn’t completely ignore an energy supply shock, buttressing the case for higher rates.
“Nobody has an appetite to fade this move because if you did try to fade this move in the past couple weeks, it just continues to go against you,” said Izaac Brook, U.S. rates strategist at RBC Capital Markets.
The impact is already visible in the real economy. U.S. 30-year mortgage rates have jumped to 6.38%, threatening the spring home-buying season. In the euro area, Bloomberg Economics projects the shock could add one percentage point to annual inflation and shave 0.6% from GDP if oil remains around $110 a barrel.
Governments have attempted to cushion the blow. The International Energy Agency has coordinated a record release of strategic petroleum reserves, potentially adding up to 3 million barrels a day to the market. The U.S. also temporarily lifted some sanctions on Russian and Iranian oil.
However, these are finite measures. The closure of the strait removes a net 9 million barrels a day from the market, a gap larger than the combined consumption of Germany, France, Italy, Spain, and the UK. The situation is more dire in liquefied natural gas, where few strategic stockpiles exist to offset the loss of Qatari cargoes.
“The playbook is pretty bare at this point,” said Mike Sommers, CEO of the American Petroleum Institute, questioning how much more the U.S. can do to protect consumers.
The last time the world faced an energy shock of this magnitude was during the 1970s Arab oil embargo, which led to a painful period of stagflation and a deep global recession. Jeff Currie, chief strategy officer of energy pathways at Carlyle Group Inc., warned of a similar outcome. “You could lose between 5-10 million barrels a day of demand, which will have a significant impact similar to the seventies,” he said.
This article is for informational purposes only and does not constitute investment advice.
