Bond Market Signals Renewed Worry Over Iran War

The bond market is flashing red on the Iran war again. Yields are ripping higher, oil is back at triple digits, and Treasury investors are pricing in a longer, more expensive conflict than Wall Street had hoped for.

Yields blow out to multi-year highs

The 10-year US Treasury yield rose four basis points to 4.71%, its highest level since January 2025. Prior to the war with Iran, which started in late February, the 10-year yield dipped below 4%.

Renewed tensions between Washington and Tehran have pushed up oil prices once again, with Brent crude surging 7% on Thursday to hit $100 per barrel. That is the kind of move that forces rate expectations to reset in a hurry.

Why the bond market is nervous

The conflict has rocked the massive US Treasury market — with roughly $30 trillion in value — as investors weigh the impact of surging oil prices and the possibility that the Federal Reserve could keep interest rates higher for longer, or even raise them, if inflationary pressures intensify.

RSM chief economist Joseph Brusuelas has been direct about it. “The Treasury market is signaling stress,” Brusuelas said, adding that he believes investors were finally responding to the perceived severity of the oil price shock and its impact on US debt and inflation.

Higher yields are also a sign that bond investors are placing a higher risk premium on US Treasurys, due to the uncertain economic outlook and the potential for steeper deficits as the war drags on.

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Auctions and supply are cracking

This past week, auctions for two-, five- and seven-year Treasury notes all drew weak demand, forcing yields to go higher than expected. That’s a stark contrast from last month, when a Treasury offering saw the highest demand ever in the history of 30-year auctions.

The fiscal side is not helping. The cost of the US war on Iran is worsening the debt picture amid reports the Pentagon is seeking $200 billion from Congress.

Spillover risk to stocks and housing

That distress could eventually spread to other areas of the financial system — in particular, the US stock market, Joseph Brusuelas, the firm’s chief economist, wrote in a note. Equities already felt it: the Dow fell 507 points, or almost 1%. The S&P 500 fell 1.2% and the Nasdaq Composite sank 2.15%.

Housing is caught in the crossfire too. The average 30-year fixed hit 6.58 percent this week, the highest in nearly a year. Before the Iran fighting began, those rates had slipped below 6 percent.

Options market and stocks to watch

Watch for continued flow in rate- and oil-sensitive names as traders reprice the war premium.

• TLT: watch for put activity if long-duration Treasurys keep selling off on higher-for-longer repricing.
• USO and XLE: watch for call flow as Brent presses $100 on Iran headlines.
• XHB: watch for hedging as mortgage rates near 7% pressure homebuilders.
• LMT and RTX: watch defense flow with the Pentagon reportedly requesting $200B more.
• SPY: watch for equity beta to bond volatility if yields keep grinding higher.

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