Original Title: The Bond Market Is Flashing Red, The Next "Phase" Of The Iran War
Original Author: The Kobeissi Letter
Translation: Peggy, BlockBeats
Editor's note: Against the backdrop of escalating geopolitical conflicts, the focus of the market is quietly shifting. Initially, discussions centered on oil price shocks and the situation in the Middle East, but as the war enters a stalemate, a more systematic variable has begun to emerge: financial conditions themselves are tightening.
The core judgment presented in this article is that what truly dominates the current market is no longer the war itself, but the disorder in the bond market.
In the past month, the yield on the U.S. 10-year Treasury has risen sharply, directly reshaping interest rate expectations from a “rate cut path” to “rate hikes being discussed,” and exerting pressure on the stock market, commodities, and even policy space. In this process, the continued weakening of the labor market and the resurgence of inflation expectations have amplified the Federal Reserve's dilemma.
More concerning is that the author places this round of market volatility within the framework of policy response functions: when yields approach the “policy pivot range” of 4.50%-4.70%, the probability of government intervention will significantly increase. Whether it’s historical tariff pauses or recent changes in the rhythm of “peace negotiations,” both are interpreted as concrete manifestations of bond market pressure transmitting to the policy level.
This raises a deeper question: when the bond market begins to dominate asset pricing and the pace of policy, what signals should market participants actually follow? Geopolitical narratives or marginal changes in the interest rate curve?
In this round of structural change, this article attempts to provide a clear answer—focus on the bond market. Because it not only reflects risks but also determines the boundaries of those risks.
The following is the original text:
As peace negotiations for the Iran war stall, an urgent question is emerging in the U.S. market: the bond market is “failing.” Amid severe turmoil in the bond market, we believe the probability of “intervention” is rising rapidly. What does this mean? Let’s explain below.
Before we begin, it’s recommended that you bookmark this article as it will serve as a reference guide for market trends in the coming weeks.
When the Iran war broke out on February 28 (triggered by the U.S. and Israel's assassination of Iran's supreme leader Khamenei), oil prices initially rose by less than 15%. The U.S. at that time judged that the assassination would quickly trigger a regime change in Iran, resulting in a relatively swift and less disruptive outcome. But now, 27 days into the Iran war, Iran has rejected the U.S.-proposed “15-point peace plan,” and peace negotiations have clearly stalled.
It is now uncertain whether either side still clearly wishes to end this war. Therefore, oil prices remain high, with WTI crude oil prices approaching $100 per barrel again. But this is no longer the biggest issue facing the market. The real issue has shifted to the bond market, which is rapidly evolving into the largest source of resistance for the global economy.
Core Issue
In the early days of the war, oil prices were the market's focus and still are today. The reason is simple: the oil market reflects the shocks of war most directly and quickly.
But now, the bigger issue is: the sudden rise in U.S. Treasury yields.
As shown below, over the 27 days since the Iran war broke out, the yield on U.S. 10-year Treasuries has risen from about 3.92% to 4.42%, a cumulative increase of 50 basis points. It is worth noting that prior to the war, the market was still focused on how many times interest rates would be cut in 2026.
U.S. 10-year Treasury yields since the outbreak of the Iran war
The current speed of the rise in U.S. 10-year Treasury yields, as well as the overall ascent of U.S. bond yields in a broader sense, is roughly comparable to the performance during April 2025’s “Liberation Day” period.
However, this time the backdrop is far more complex, and stabilizing the bond market is not as simple as it appears on the surface. This will soon become the most central narrative in the market.
From Rate Cut Expectations to Rate Hike Pressure
To better understand the severity of this shift, we can review the market's rate expectations at the end of 2025.
As shown below, the market's “baseline scenario” at that time was that, by 2026, the Federal Reserve's federal funds rate would be lowered to a range of 2.75% to 3.00%. There was even over a 25% probability that rates would fall even lower.
Interest Rate Expectations for 2026 (Screenshot from September 2025)
Now looking at the current pricing of rate futures. Today's “baseline scenario” indicates that interest rates will basically remain unchanged until September 2027, with the Federal Reserve's federal funds rate expected to be in the target range of 3.50% to 3.75%.
This level is 75 to 100 basis points higher than expectations a few months ago, and this judgment has extended to the end of 2027.
Interest Rate Futures as of March 26, 2026
In fact, the market has begun to discuss the possibility of “rate hikes” again: currently, there is about a 43% probability that the Federal Reserve will raise rates before the end of 2026. Objectively, it has become very difficult for the market to bear such a shock.
Next, let’s explain the reasons.
The Labor Market Will Only Get Worse
On September 17, 2025, the Federal Reserve implemented a rate cut as widely expected by the market and hinted at two more rate cuts by the end of the year. At that time, although inflation was still significantly above the Federal Reserve's long-term 2.00% target, market concerns about the U.S. labor market were escalating.
In the post-meeting statement, the Federal Reserve Board described economic activity as “slowing somewhat” and added that “employment growth has slowed,” while noting that inflation “has already risen and remains at relatively high levels.” The weakening of employment and rising inflation have in fact deviated from the Federal Reserve's dual goals of “stabilizing prices” and “full employment,” but at that time the labor market issue was more pronounced.
As of today, the state of the labor market has only worsened. Compared to September 2025, the market's capacity to absorb higher rates is actually weaker.
The reality is: first, the U.S. employment data for 2025 has been revised down by 1.029 million jobs, marking the largest annual downward revision in at least 20 years. Previously, the employment data for 2024 and 2023 was also revised down by 818,000 and 306,000, respectively.
Over the past three years, 2.153 million jobs have been “corrected out” of the initially reported data. Since 2019, the total number of jobs that have been corrected out has reached 2.5 million, and in the past seven years, there have been negative revisions to employment data in six of those years.
Annual Revisions of Non-Farm Payroll Employment
To give another example, similar situations are quite numerous. The average duration of unemployment in the U.S. rose by 2 weeks in February to 25.7 weeks, reaching a four-year high. Since October 2023, the duration of unemployment has increased by a cumulative 6.3 weeks, growing at the fastest pace since 2020-2021. This level is now significantly higher than the pre-pandemic levels of 2018-2019.
Surge in Average Duration of Unemployment in the U.S.
Again, this type of indication is not an exception; we are witnessing a persistent and intensifying weakness in the labor market.
In our view, the U.S. economy is unlikely to withstand a 10-year Treasury yield approaching 4.50%, let alone rising above 5.00%.
Why Is This Happening?
From a macro perspective, the rise in U.S. Treasury yields and the reversal of rate cut expectations can be attributed to one core variable: inflation.
The Federal Reserve's “dual mandate” was established by the U.S. Congress in 1977, requiring the central bank to achieve two primary goals through monetary policy: maximum employment and price stability. As mentioned earlier, when the Federal Reserve resumed rate cuts in 2025, the Federal Open Market Committee (FOMC) deemed that the weakness in the labor market was “more important” than the still elevated inflation.
However, with rising energy prices, the prolonged Iran war, and the ever-lengthening post-war energy recovery cycle, inflation has once again become the primary contradiction—not because the labor market has improved, but because inflation itself has worsened.
U.S. 12-Month Inflation Expectations
As shown above, inflation expectations in the U.S. for the next 12 months have soared to 5.2%, the highest level since March 2023. Notably, this reversal in expectations began in early January and rapidly accelerated as President Trump threatened Iran, mobilizing troops in the Middle East, and then launched attacks on Iran on February 28.
This also brings us back to the CPI inflation chart based on modeled estimates below. As we have repeatedly emphasized since the outbreak of the war, if oil prices average $95 per barrel over three months, U.S. CPI inflation will rise to 3.2%.
Kobeissi Letter: U.S. Oil Prices and Inflation Model
But the reality is that, given the current series of chain transmission effects, the magnitude of inflation may well exceed 3.2%.
We Believe “Intervention” Is Imminent
During the severe market fluctuations triggered by the trade war at the beginning of 2025, there was a key factor that ultimately prompted President Trump to announce a 90-day pause on tariffs in April 2025—that was the bond market.
In the chart below, we outline the complete timeline of rising U.S. Treasury yields during the so-called “Liberation Day,” which was precisely this round of yield surges that ultimately led to the policy shift on April 9, alleviating market pressure.
In a live interview on April 10, Trump also clearly stated that he was closely monitoring the performance of the bond market.
U.S. 10-Year Treasury Yields in April 2025
It can be seen that U.S. 10-year Treasury yields in the range of 4.50% to 4.70% may form what we refer to as Trump’s “Policy Shift Zone.” This level is slightly higher than the current position and we generally agree: once yields reach this range, policy intervention will become necessary to avoid a severe downturn in the U.S. economy.
U.S. 10-Year Treasury Yields, Trump’s “Policy Shift Zone”
In our view, this time will also be no exception. In fact, we believe President Trump’s announcement of “peace negotiations” on March 23 was not a coincidence, as shown below.
March 23, The First Signal of Intervention
On March 23 at 4:30 AM EST, we pointed out: compared to the energy market, the bond market has become more “disordered.” Shortly thereafter, U.S. 10-year Treasury yields rose to 4.45%, and President Trump likely engaged in decision-making discussions similar to those on April 9, 2025, when he announced the 90-day pause on tariffs.
Just one hour later, Trump announced a 5-day delay on strikes against Iranian power facilities and stated that “productive” dialogues between the U.S. and Iran had begun, aiming to end the war.
This might have been the first signal of intervention.
What Should You Do Now?
One of the most common questions we receive is: what does this mean?
From a macro perspective, we want to emphasize one point: the Trump administration is highly sensitive to fluctuations in the stock, commodity, and bond markets. This is good news for investors—Trump does not want the market to decline, and his level of concern on this point is notably greater than that of previous administrations.
This is also why, after the initial surge in oil prices, overall prices remain somewhat controlled. Crude oil investors generally believe that once oil prices approach $120 per barrel again (as seen in the early days of the war), Trump will swiftly take intervention measures.
More broadly, we believe that as U.S. Treasury yields rise, downward pressure on the stock market will intensify; but when yields approach what we call the 4.50% to 4.70% range, the imminent policy shift or “intervention” will limit the downside for the stock market.
Furthermore, Trump, the Federal Reserve, and the entire government understand that the U.S. labor market cannot withstand higher rates for long. This also means that the current situation is unlikely to evolve into a “long-term war,” but rather is more likely to see some degree of easing or resolution in a matter of weeks rather than months.
Lastly, behind these fluctuations and noise, we want to emphasize: the AI revolution is only accelerating. Those AI companies that have been leading the market since 2022 and are now under pressure due to corrections are actually investing more and building faster.
Our judgment regarding the stock market and the long-term trend of AI has not changed.
Continue to Monitor the Bond Market
What we are experiencing is not just volatility, but a transition of a “decisive variable.”
In recent weeks, market attention has focused on oil prices, war news, and geopolitical escalations. But beneath the surface, a more powerful force is gathering and beginning to dominate the situation.
The bond market is once again determining the direction of stocks, commodities, and even policy itself. History has repeatedly proven that when financial conditions tighten too quickly, the question of intervention is never “whether it will happen,” but rather “when it will happen.”
As we have emphasized throughout this year, this market is increasingly resembling a “pattern recognition” game, where the key is acting one step ahead of the “crowd.”
We believe that the bond market will become the next most important narrative.
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