The ongoing conflict in the Middle East has caused a significant strain in financial markets, with investors struggling to find safe havens in bonds. The worst rout in Treasurys since April's tariff chaos has left investors with few places to shelter, as the Hormuz blockade has spurred one of the largest oil shocks on record.
The resulting market strain has been painful for both investors and the economy, with the iShares Core 60/40 Balanced Allocation ETF losing 6.3% since the fighting started in late February. Falling bond prices have driven up the yield on the 10-year Treasury note by almost 0.5 percentage point, lifting borrowing costs throughout the economy.
Rates on 30-year mortgages jumped to 6.38% last week, reversing a slide that had carried them to their lowest levels since 2022 and threatening the spring home-buying season. Some fear the selling has taken on a momentum of its own, with the war-fueled market swings forcing hedge funds to shed bonds to cover bets made with borrowed money.
Investors of all stripes were caught off guard by the Iran war, which arrived just as many were growing increasingly bullish on bonds. Many investors still argue that a protracted war could eventually lead to lower yields, but for now, that has been a losing argument.
As of Friday, the yield on the 2-year U.S. Treasury note was 3.915%, up from 3.377% before the war started. The yield on the 10-year note stood at 4.439%. Overseas, the threat of higher interest rates is more pronounced, with selling in European government bonds adding to the pressure on U.S. Treasurys.
