For as long as most investors can remember, the playbook was simple: when the world gets scary, buy U.S. Treasurys. Geopolitical shock? Risk off? Pile into government bonds and wait for the storm to pass.
That playbook just broke — and it happened at the worst possible time.
After U.S. and Israeli forces struck Iran on February 28, killing Supreme Leader Ayatollah Ali Khamenei and triggering retaliatory attacks that left three U.S. service members dead, Treasury yields did the opposite of what everyone expected. Instead of falling as money rushed to safety, the 10-year yield climbed back above 4%. The 2-year yield flipped 6 basis points higher. Investors were not buying protection. They were running from it.
The problem is stagflation — the ugly word nobody wanted to hear again. Oil surged as much as 14% in a single session, with Brent blasting through $80 a barrel on fears that the Strait of Hormuz could be effectively shut down. JPMorgan warned that if disruptions last more than three weeks, Gulf producers could exhaust storage capacity and be forced to shut in production entirely — a scenario that could push Brent into the $100-$120 range.
Here is where it gets painful for bond investors: Mizuho estimates a sustained $10 rise in oil knocks 10-20 basis points off GDP growth over the following year. Oil has already rallied $20 per barrel in six weeks. But that same price spike also adds roughly 0.2 percentage points to annual inflation for every $10 increase. With the Fed’s preferred inflation measure already at 3% and climbing, and producer prices running hotter than expected, the math is ugly.
Mizuho’s Jordan Rochester put it bluntly: oil in the $100-$130 range for any sustained period would not just kill rate cuts — it could force the Fed into a mild rate-hiking cycle at the very least. Meanwhile, the year-on-year price of Brent just turned positive for the first time since mid-2024, meaning oil is no longer a deflationary tailwind in CPI calculations. It is now an inflationary headwind.
Gold, for its part, is doing exactly what Treasurys used to do. Spot gold surged 2.5% to $5,410, continuing its massive run as the asset investors actually trust in a crisis. Bitcoin? Down. The Swiss franc? Slightly higher. Even the Japanese yen — Asia’s traditional safe haven — weakened, dragged down by Japan’s net oil import dependency.
Benjamin Jones, global head of research at Invesco, summed up the dilemma: bond yields could rise in the short term on concern about higher inflation. He noted that while some government bonds may see safe-haven demand, inflation fears would likely dominate — especially for U.S. Treasurys, given America’s relative energy independence compared to Europe and Japan.
The bottom line? The bond market’s safe-haven trade is not dead, but it is deeply wounded. When the biggest geopolitical shock in years cannot generate sustained Treasury buying, something fundamental has shifted. Investors caught between the rock of recession fear and the hard place of resurgent inflation may find that the old shelter just does not keep the rain out anymore.