What Iran war means for global bond market

As Centcom continues its nightly blitz on Iran, the so-called 60-day ceasefire has effectively ended. In truth, the fire never ceased.

If Count Tolstoy lived in 2026, his magnum opus might well be renamed… War or Peace? Again.

The Islamic Revolutionary Guard Corps (IRGC) generals will not reopen the Strait of Hormuz while sanctions relief on Kharg Island oil sales remains a big ask. They know US airstrikes have made it impossible to attract the $300 billion in capital flows that were meant to help rebuild Iran’s war-ravaged economy.

A new ultra-nationalist fervour appears to be taking hold among young Iranians, whereas in January many were willing to risk their lives protesting in Tehran against Ayatollah Ali Khamenei.

Pro-deal pragmatists such as President Masoud Pezeshkian and foreign minister Abbas Araghchi are jeered as “appeasers” by fellow citizens angered by continuing US and Israeli airstrikes.

The IRGC elite has thus concluded that closing Hormuz is key to the survival of Iran’s new leadership.

Paradoxically, Donald Trump and Benjamin Netanyahu achieved regime change by launching this epic war – just not the regime change they wanted.

The IRGC junta has concluded that the key to its survival is neither its frozen petrodollars abroad nor uranium enrichment, but control of the world’s most strategic maritime energy chokepoint. That means greater uncertainty, energy insecurity and elevated geopolitical risk – bad news for Wall Street and its global peers.

The world’s most important debt market is the $30 trillion, uber-liquid US Treasury sector. The 10-year Uncle Sam IOU yielded 3.94 percent when Trump unleashed the angels of death over Iran on February 28, plunging the GCC into its most protracted oil export crisis since the 1974 oil embargo.

The 70-basis-point rise in 10-year US Treasury yields during the past five months – to 4.67 percent as I write – reflects higher real interest rates, while US GDP growth and inflation breakevens have remained static.

The US Treasury yield curve is getting steeper, which is bad news for bond yields in the UK, France and emerging markets – all of which depend on the kindness of strangers to bankroll their public debt and generous welfare states. Issuance of French OATs and UK gilts has surged alongside global bond yields.

Saudi Arabia, the biggest issuer of sovereign debt in the Mena region, may find that finally investors begin to care about debt and deficits, now that Trump’s war with Iran means the US budget deficit is 7 percent of GDP.

Japan is often a leading indicator because its pension funds and insurers own more than $3 trillion in US securities, including $1.2 trillion in Treasuries. Its inflation stands at 3.4 percent, while the 10-year JGB yield is 2.7 percent. The Empire of the Rising Sun is becoming the Empire of the Sinking Yen. If confidence in government bond markets begins to crack, the consequences could spread far beyond Japan.

Meanwhile, Uncle Sam remains hooked on short-term debt to finance “Trumpnomics” – from his beloved White House ballroom to a trillion-dollar Pentagon budget. Lavish wartime borrowing could well continue through to 2028.

So there is no way Federal Reserve chair Kevin Warsh can do anything but keep short-term rates unchanged even as inflation rises. This suggests a return of the bond vigilantes and a 5 percent yield on the 10-year Treasury note. Ouch!