Bond selloff deepens after Israeli strikes on Iran

The selloff in the 10-year Treasury kicked off Friday right after Israel abruptly launched military strikes against Iran, and the pressure hasn’t let up since.

Investors dumped long-term US bonds after the conflict escalated, driving yields higher. Based on past incidents between the two countries, this market reaction could keep rolling for weeks.

That’s according to Bloomberg, which analyzed how Treasury yields moved after Iran’s missile attack in April 2024 and another escalation in October last year—both of which pushed 10-year yields up fast and held them there for about 30 days.

Yields on the 10-year jumped nine basis points since the latest wave of attacks began, fueled by a spike in oil prices. Israel claimed that Friday’s attacks hit Iranian sites tied to its nuclear operations. Over the weekend, tensions deepened.

Iranian state media said Israeli drones struck the South Pars gas field in southern Iran on Saturday. The attacks led to canceled nuclear talks, more casualties, and more energy market volatility. On Monday, West Texas Intermediate crude rose 0.7% to $73.50, and Brent moved up 0.48% to $74.64 per barrel.

Investors react to higher inflation risks from oil and war

Markets responded to the conflict with a familiar pattern: oil spiked, gold went up, the dollar got stronger, and stocks fell. That chaos spilled into bonds.

The 10-year Treasury yield rose again Monday by 1 basis point to 4.432%, while the 2-year climbed 2 basis points to 3.974%. Traders moved quickly, pricing in more inflation risk now that crude is back on the rise.

President Trump has been inflaming inflation concerns with new tariffs, and the US debt outlook is also raising eyebrows. That combination has made bondholders more cautious, demanding higher returns to keep lending to the government. All of that has hit Treasury holders hard, and Friday’s escalation in the Middle East just added more risk.

The overall US yield curve is changing too. Short-term yields are moving slower. Since Thursday, the 2-year yield has climbed by eight basis points, but the long end—especially the 10-year Treasury—has seen steeper gains. That means the curve is steepening, which usually signals the market’s belief that inflation or spending will rise in the future.

While inflation pressure is building, the May consumer price index reading came in cooler than most feared. But investors haven’t calmed down. The focus has now moved to how the Federal Reserve will respond.

The Fed is meeting this week, and markets are currently pricing in a 96% probability that they will hold rates steady. But even a rate pause won’t stop the bleeding in longer-term bonds if the Middle East conflict keeps dragging on.

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