Israel-Iran Conflict: U.S. Treasuries and Dollar Fade as Yen and Swiss Franc Weaken – Is the Safe-Haven Paradigm Shifting?

TradingKey - Bank of America Securities analysts Alex Cohen and Mark Cabana reported that the market's reaction to the geopolitical tensions between Israel and Iran is redefining "safe haven": oil prices surged, stock markets fell, and traditional safe-haven assets such as U.S. Treasuries were sold off. The forex market exhibits subtle changes as well: the dollar experienced only a brief rise, while traditionally safe-haven currencies like the yen and Swiss franc have depreciated instead of strengthening.

Bank of America attributes these anomalies to inflation concerns and fiscal risks undermining investor trust in traditional safe-haven assets.

Oil Prices Drive Forex: Yen, Swiss Franc Slip; Oil Producers' Currencies Rise

According to the Bank of America report, there is a pronounced divergence in G10 currency performance: amid soaring oil prices, traditional safe-haven currencies are weak, whereas oil-related currencies are showing considerable strength. The report notes that the Japanese yen and Swiss franc, two traditional non-dollar safe-haven currencies, have depreciated against the dollar, despite their positive correlation with the VIX. As oil-importing countries, these currencies have the strongest negative correlation with Brent crude oil prices among the G10.

In contrast, the Norwegian krone and Canadian dollar, linked to oil production, have outperformed in the G10 due to their sensitivity to oil price fluctuations, overshadowing positioning factors. The Canadian dollar reached an eight-month high against the U.S. dollar last Friday; Canada is the largest oil supplier to the U.S. Meanwhile, the Norwegian krone also remains at historically high levels, with Norway as a major oil producer.

Bonds' Safe-Haven Attribute Also Weakens

When news of Israel's airstrikes on Iranian targets emerged, U.S. Treasuries saw only a slight uptick, with 10-year yield showing minimal movement. On the 13th, the 10-year U.S. Treasury price fell back, with yields rising 6.5 basis points to close at 4.424%, contrasting with the typical surge in safe-haven buying that occurs amid escalating Middle East tensions.

Allianz Group's chief economic advisor, El-Erian, commented that the world is losing confidence in U.S. sovereign debt. Tracking flows of safe-haven funds reveals no signs of influx into the U.S. bond market. This observation aligns with Bank of America's findings: global core sovereign bonds experienced significant sell-offs following the initial reaction, rather than rising from safe-haven inflows.

The Logic of Safe Havens is Changing

Last Friday, Comex gold closed at $3,452 per ounce, marking a historical closing high. George Catrambone, head of fixed income at DWS Americas, indicated that gold is now perceived as a new form of risk-free asset, while 10-year and 30-year U.S. Treasuries are no longer regarded as safe-haven tools.

Bank of America suggests that the erosion of safe-haven status likely stems from inflation worries and increased sovereign debt supply. U.S. Treasuries might need to wait longer to regain their traditional safe-haven qualities unless there is clearer evidence that geopolitical tensions will lead to a slowdown in global growth, a drop in inflation, or increased investor demand.