Markets opened with a notable shift in tone as the U.S.–Iran conflict escalated. Treasury yields were initially lower in the pre‑open, with the 10‑year briefly dipping to ~3.94%, reflecting a textbook flight‑to‑safety setup. That move quickly reversed once cash trading began, as oil prices surged on concerns around supply disruption in the Strait of Hormuz, reigniting inflation fears and pushing the 10‑year back above 4%.
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The spike in oil has driven a sharp move higher in inflation expectations, undermining the traditional safe‑haven bid for bonds and forcing markets to reassess the Fed path. As a result, rate‑cut expectations are being pushed further out, with investors increasingly viewing this as an inflation shock rather than a growth shock.
Mortgages have borne the brunt of the repricing. Current‑coupon MBS are selling off sharply, down roughly 8–10 ticks, pushing mortgage rates higher on the day. The price action is somewhat counterintuitive given the geopolitical backdrop, but it reinforces a key takeaway: as long as higher energy prices dominate the narrative, both Treasuries and mortgages remain vulnerable—even in what would typically be a flight‑to‑safety environment.
