Strategists Warn Yields to Stay High Even If Iran War Ends

Strategists Warn Yields to Stay High Even If Iran War Ends 1 / 3 Strategists Warn Yields to Stay High Even If Iran War Ends Matthew Burgess and Masaki Kondo Mon, May 25, 2026 at 5:30 AM GMT+7 6 min read BARC BAC JPM 8301 GS (Bloomberg) -- For all the hand-wringing over war-related inflation fears, there are signs that other drivers are having as much a bearing on longer-term borrowing costs. Nvidia CEO Urges Super Micro to Tighten Up on Compliance Trump Says He’ll Announce Negotiated Deal With Iran Shortly Iran, US Signal Progress in Peace Talks as Issues Unresolved Rubio Sees Good News Coming on Hormuz as Iran Talks Continue Trump to Force Foreigners Seeking Green Cards to Go Home First In the US, so-called real yields, which strip out inflation, have had a greater impact, indicating bond investors aren’t just worried about price pressures from the Iran war. Other culprits include signs already large public debt burdens will swell even further, fallout from the AI investment boom and the mounting chance central banks such as the Federal Reserve will raise rather than cut interest rates. The speculation, underscored by a Bloomberg analysis and highlighted by strategists at ING Bank NV, Goldman Sachs Group Inc. and Barclays Plc, is that the recent jump in some long-term yields will not fully reverse even if the inflation spurred by costlier oil retreats. That risks keeping market borrowing costs elevated around multiyear highs even after the conflict ends, maintaining pressure on governments and economies. “The argument that duration is selling off globally due to inflation fears is hard to square with market pricing of medium- and long-term inflation risk,” said Jonathan Hill, head of US inflation strategy at Barclays. “Instead, the interaction between rising debt levels, potentially higher neutral rates, and AI could be driving real rates higher.” The so-called neutral rate is the level which neither spurs nor slows the economy. While the surge in oil prices may be capturing headlines, break-even rates that measure the inflation expectations of bond markets haven’t risen as far as overall rates in the US and UK. Hill notes even with the war underway, 10-year breakevens in the US are 50 basis points below where they were in the first half of 2022, when the Fed was jacking up rates. And the so-called 5-year, 5-year breakeven rate, a proxy for market-based measures of medium-term inflation expectations, are around where they were in December, at 2.2%. At Bank of America Corp., economists Claudio Irigoyen and Antonio Gabriel are monitoring shifts in the yield curve to determine what’s moving bond markets. That’s the gap between long- and short-term yields. “In an environment where Fed could potentially be on the table and become a driver of even larger fiscal deficits amid rising debt servicing costs, the long end of the curve becomes more sensitive to what should be primarily a move in short-end rates,” they said. Subtracting inflation-adjusted yields from nominal rates leaves real yields, seen by some in the market as a truer measure of borrowing costs. A Bloomberg analysis shows rising real yields explains most of the move higher in overall yields in the US, while inflation is to be the major influence in Japan and Germany. Such trading means that even if the Strait of Hormuz, a critical chokepoint for global energy flows which has been closed by the war, is eventually opened, long-term rates “could find themselves a tad stranded at elevated levels” as real yields stay high, said Padhraic Garvey, regional head of research for the Americas at ING. He reckons the “entire” break in 10-year US yields beyond 4.5% has come from higher real yields. The US benchmark neared 4.70% on Tuesday before pulling back to 4.56% on Friday. “A reopening of the Strait would cap inflation expectations, but could leave real yields elevated, and if so, then Treasury yields don’t collapse lower as many currently anticipate,” said Garvey. “The bond market is not reacting to one headline,” Mark Malek, chief investment officer at Muriel Siebert & Co. wrote in a note to clients. “It is repricing a structural problem that cannot be solved with a press release or diplomatic pause.” Senior US officials said Sunday that the US and Iran were closing in on a deal that would reopen the strait, even as President Donald Trump said he won’t “rush” into an agreement. Crude oil fell in early Asia trading Monday and Treasury futures edged higher. Reasons to expect yields to stay lofty in the US include Trump’s push to cut taxes, adding to an already large debt burden and subsequent need to sell Treasuries, as well as his ongoing trade war stymieing supply chains. In an interview last week with Bloomberg Television, Jamie Dimon, chief executive officer of JPMorgan Chase & Co., said US interest rates may climb much further, citing concern about government borrowing and demand for the debt. To Phillip Lee, head of real money ra

Strategists Warn Yields to Stay High Even If Iran War Ends

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Strategists Warn Yields to Stay High Even If Iran War Ends

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