U.S. Treasury yields held largely steady on Monday, but the calm in the bond market masked a deeper unease as investors positioned for two potentially market-moving catalysts.
The Treasury market is in a waiting phase ahead of President Donald Trump’s press conference on the Iran conflict and the release of the personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge.
The President’s address could reshape expectations for Federal Reserve policy. Investors are increasingly pricing the Iran war not as a temporary geopolitical disturbance, but as a growing macroeconomic shock with the potential to alter the Federal Reserve’s policy path.
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The benchmark 10-year Treasury yield held around 4.35%, while the 2-year note hovered near 3.86% and the 30-year bond approached 4.92%, keeping long-dated borrowing costs close to their highest levels in several months.
Against the backdrop of Trump’s address, the muted day-to-day movement is not seen as stability.
The bigger story is the sharp repricing that has already taken place. Before the conflict intensified, the 10-year yield was trading below 4%. It has since climbed roughly 35 to 40 basis points, a significant move for the world’s benchmark risk-free asset.
That move tells a deeper story about what markets now fear. Ordinarily, geopolitical crises push investors into Treasuries, causing yields to fall as demand for safe assets rises. This time, yields have instead risen even as global tensions escalate.
That inversion suggests that inflation fears, driven by surging oil prices and supply-chain risks, are outweighing the traditional safe-haven bid. This is increasingly becoming a stagflation trade. Markets are now pricing a scenario in which growth slows because of the war’s economic fallout, while inflation remains sticky or even accelerates because of higher energy costs.
That is one of the most difficult environments for central banks to navigate. As oil prices remain elevated amid uncertainty around the Strait of Hormuz, investors are reassessing whether the Fed can deliver any rate cuts this year. Reuters reported that markets have sharply trimmed expectations for easing, with some desks now pushing any meaningful cuts into 2027.
The yield curve offers further insight. The spread between the 10-year and 2-year yields now stands at roughly 50 basis points, reflecting a steeper curve than earlier in the year. That steepening is often interpreted as a sign that investors expect higher long-term inflation and term premium, rather than imminent recession alone.
In practical terms, bond buyers now demand greater compensation to hold long-dated debt in an environment where inflation uncertainty is rising.
The geopolitical dimension remains the dominant driver. President Trump’s ultimatum to Iran over the reopening of the Strait of Hormuz has introduced a binary risk event into markets. If diplomacy gains traction and the waterway reopens, crude prices could fall sharply, easing inflation expectations and allowing yields to retrace.
Some analysts estimate that such an outcome could pull WTI crude lower by $20 to $30 per barrel, which would likely trigger a rally in Treasuries.
The downside scenario is more severe as any strike on energy infrastructure or a prolonged closure of Hormuz could send oil into the $130 to $150 range, significantly worsening inflation expectations and pushing Treasury yields even higher.
This is why this week’s inflation data takes on unusual significance. The PCE report will be scrutinized not just for headline inflation, but also for any early signs that the oil shock is feeding into core prices, transport costs, and consumer goods. If the data comes in hotter than expected, it could reinforce the view that the Fed must stay restrictive for longer.
That would likely pressure the long end of the curve further. The broader significance is that the Iran war is now clearly affecting global capital markets beyond commodities. It is also influencing the price of money itself. Higher Treasury yields feed directly into mortgage rates, corporate bond issuance, valuation models for equities, and the cost of refinancing U.S. government debt.
For equities, this creates a double burden: geopolitical uncertainty on one hand and higher discount rates on the other. This is especially problematic for technology and other growth sectors, whose valuations are highly sensitive to long-term yields.
Another important point is liquidity.
Trading volumes are thin because of holiday conditions in parts of Asia and Europe, which can amplify price swings. Even seemingly minor headlines from the White House or Tehran could therefore trigger outsized moves in yields, oil, and equities.
In effect, the Treasury market is no longer reacting purely as a safe haven. It is increasingly functioning as the market’s clearest gauge of whether the Iran conflict evolves into a full-fledged global inflation shock. For now, yields are steady. But the steadiness is less a sign of calm than a reflection of a market bracing for a decisive headline risk event over the next 48 hours.