- Real yields — which strip out inflation — have driven more of the rise in long-term US borrowing costs than war-related inflation fears, with 10-year US breakeven inflation still 50 basis points below 2022 levels even with the Iran conflict underway.
- Strategists at ING, Goldman Sachs, and Barclays all conclude that even if the Strait of Hormuz reopens and oil prices retreat, long-term Treasury yields could remain “stranded” at elevated levels, with the 10-year recently nearing 4.70% before easing to 4.56%.
- The structural drivers are fiscal: Trump’s push to extend tax cuts is expected to expand an already large US debt burden, requiring more Treasury issuance; JPMorgan’s Jamie Dimon said last week that rates may go “much higher” citing government borrowing demand dynamics.
- AI is also a factor — bond traders worry its short-term effect is inflationary (voracious demand for semiconductors, massive data center buildouts, surging tech corporate debt issuance) even as its long-run productivity gains might eventually ease price pressures.
What Happened?
A Bloomberg analysis, backed by commentary from strategists at ING, Goldman Sachs, and Barclays, finds that the dominant force lifting long-term bond yields is not war-related inflation but rising real yields — the inflation-adjusted cost of borrowing. In the US, real yield increases explain most of the move higher in overall rates. ING’s Padhraic Garvey says the “entire” move in 10-year US yields beyond 4.5% is attributable to higher real yields. Barclays’ Jonathan Hill notes that 5-year, 5-year forward inflation breakevens — a proxy for medium-term inflation expectations — sit around 2.2%, roughly where they were in December, far from the levels that would justify the current yield spike on inflation grounds alone. The conclusion: even if a Strait of Hormuz reopening caps oil prices and cools energy-driven inflation, long-term yields may not fall materially.
Why It Matters?
This is a critical distinction for every asset class. Equity investors are pricing some probability that an Iran peace deal quickly relieves rate pressure and sets up a soft landing. Bond strategists are saying that trade may be wrong. The forces keeping real yields elevated — rising neutral rates, persistent fiscal deficits, surging Treasury supply, and AI-driven near-term inflation — are not resolved by a diplomatic agreement in the Strait. Higher real yields are a more durable form of rate pressure than inflation-driven yield spikes, because they reflect the economy’s underlying demand for capital and the compensation investors require for structural uncertainty. As Muriel Siebert’s CIO Mark Malek put it, “The bond market is not reacting to one headline. It is repricing a structural problem that cannot be solved with a press release or diplomatic pause.”
What’s Next?
Traders who began 2026 expecting Fed rate cuts have shifted to pricing in potential rate hikes even under new Fed Chair Kevin Warsh. The next key data points are CPI, PCE, and Treasury auction demand — which will test whether the market is right that fiscal dynamics are overwhelming geopolitical relief. Goldman’s Phillip Lee says flatly “I think rates are going higher,” citing fiscal deficits, Treasury issuance, and debt sustainability concerns. The risk for investors is that a Iran deal-fueled equity rally and oil relief create a false sense that the macro backdrop has cleared — while the bond market quietly signals otherwise.
Source: Bloomberg
