Of Bombs and Bonds

Research evidence excerpt

Of Bombs and Bonds

ce further Iranian concessions. If he's not willing to escalate or to keep the Strait closed indefinitely,

he needs to relax his red lines in service of a deal. Could bond markets force him down the latter path? Despite

Trump's reference to newly "serious negotiations," we don't see why Iran would suddenly capitulate, after their last few

offers showed virtually no movement. He clearly wants to somehow force Iranian capitulation. But as discussed below,

we're pessimistic about the prospects for military re-escalation to force novel concessions. And after last week's global

sovereign bond yield backup, this is the first time we may be close to the point that markets could force Trump's hand.

Equity markets are clearly nowhere near the strike price on the "Trump put," but bond markets may be getting closer.

4. Treasury yields are getting concerning in level terms, with certain tenors reaching multi-decade highs, but we're

not (yet) seeing the kinds of disorderly moves that seemingly forced Trump to back off after Liberation Day. Wolfe's

Chris Senyek noted yesterday that last week was the largest upward move in the 10y yield since Liberation Day. And

we've certainly reached alarming levels at the long end of the yield curve, with the 30y hitting 19-year highs on Friday.

But as shown in Exhibit 1 below, both legs upward on Treasury yields during this war have been much more gradual

than the nonlinear market response after Liberation Day, when stocks, bonds, and the dollar all sold off sharply. Our

sense is that the action-forcing element of the market's response to Liberation Day was the WH's impression that panic

was setting in and markets were spiraling out of control, rather than the absolute size of the moves. In the current