Since President Trump launched a military strike in Iran on Saturday — effectively declaring war — bond market yields have been rising. It’s a sign that investors are actually selling Treasury bonds.
In times of geopolitical turmoil, investors generally pour money into the safety of government bonds, which pushes bond prices higher and yields lower.
In uncertain times, “other asset classes will tend to be a lot more volatile than Treasurys. So it’s a place to put your money when you’re being cautious,” said Kathy Jones, chief fixed income strategist with the Schwab Center for Financial Research. (Charles Schwab is a Marketplace underwriter.)
Over the last few days, investors had indeed been piling money into Treasury bonds. By Monday morning, though, Jones said investors realized that stocks and other kinds of assets weren’t reacting as strongly as investors expected.
“So stocks were lower, but not maybe as much as people thought. Oil prices are up, about 6 or 7%, but maybe not the 10 or 15 or 20% that they had feared might happen,” she said.
Bond investors still have plenty to worry about.
For one, Jones said, a prolonged conflict could be costly.
“That is a concern, because we already have a large and rising fiscal deficit. If we add to it by more defense spending, then that is going to create expectations that we have to issue even more bonds to fund that,” she said.
If investors think the government’s going to flood the market with new bonds, they’re going to demand to be paid higher interest. And higher Treasury yields could cause all kinds of borrowing to get more expensive.
Another reason investors are demanding higher rates is because they want to be compensated in case prices pick up, said Randy Vogel, head of fixed income at Wilmington Trust.
“Higher oil prices leads to more inflation, and more inflation leads to higher interest rates,” he said.
Rising energy prices will likely continue to push Treasury yields higher, said Winnie Cisar, head of strategy at the research company CreditSights.
But Cisar said there’s also a point where energy prices could start to whittle away at the economy.
Because if prices rise too high, “consumers are not going to have the ability to withstand that price increase, and demand is going to fall off a cliff,” she said.
Cisar said corporations would feel the pinch, too.
“For example, if you are an airline, and all of the sudden oil prices are double what you were expecting, that’s probably going to have some sort of impact on your hiring plans for the year,” she said.
If that were to happen, Cisar would expect Treasury yields to fall.