The sell-off in the 10-year Treasury started on Friday just after Israel launched military strikes against Iran, and the pressure hasn’t dropped since. Investors dumped long-term US bonds after the conflict increased, driving yields higher. Based on previous incidents between both countries, the market reaction could continue for weeks.
According to Bloomberg’s analysis of how Treasury yields moved after Iran’s missile attack in April 2024 and another escalation in October last year—both 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.
Treasury pressure remains as investors react to inflation risks
Iranian media outlets said a drone belonging to Israel struck the South Pars gas field in Southern Iran on Saturday. The attacks led to the cancellation of 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. The markets also responded in a familiar pattern, with the price of oil spiking, gold rising, and the US dollar getting stronger. Stocks also dropped with the chaos spilling into bonds.
The 10-year Treasury yield climbed 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 contributing to inflation concerns with new tariffs, and the US debt outlook is also a cause for concern. 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 has been on the rise, the May consumer price index reading came in better than most feared. However, investors are still agitated and the focus has now moved to what the response of the Federal Reserve will be. The Fed is expected to meet 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.