The escalating conflict with Iran is triggering a sharp spike in long-term interest rates, reshaping expectations for inflation, Federal Reserve policy, and the government's finances in ways not seen during previous geopolitical crises.
The 10-year Treasury yield jumped roughly half a percentage point in the days following U.S. and Israeli military action, climbing to 4.45% from 3.96%. Government debt auctions this week revealed weak demand, forcing the Treasury to offer higher yields to attract buyers. Mortgage rates have climbed even more steeply, rising from 5.99% in late February to 6.62% by Thursday.
The movement breaks from historical patterns. Past geopolitical shocks typically sent investors fleeing to Treasury securities as safe havens. This time, the opposite is happening: investors are demanding higher compensation to hold longer-dated government debt.
What's Actually Driving the Rise
The culprit is not primarily inflation concerns. While oil prices have surged, investors are pricing in only modest inflation increases over the next decade, with inflation-protected Treasury yields suggesting roughly 2.34% annual increases ahead. That accounts for barely a fifth of this month's yield jump.
The real story lies in what economists call the
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