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Original Title: The Bond Market Is Flashing Red, The Next "Phase" Of The Iran War

Original Author: The Kobeissi Letter

Compiled by: Peggy, BlockBeats

Editor's Note: Against the backdrop of escalating geopolitical conflicts, the market's focus is quietly shifting. Initially, discussions centered on oil price shocks and the Middle East situation. However, as the war enters a stalemate phase, a more systemic variable is beginning to emerge: financial conditions themselves are tightening.

The core thesis 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.

Over the past month, the rapid rise in the US 10-year Treasury yield has directly reshaped interest rate expectations, shifting from a "rate cut path" to a "re-discussion of rate hikes," and has exerted pressure on stocks, commodities, and even policy space. In this process, the persistent weakness in the labor market and the renewed rise in inflation expectations have amplified the Federal Reserve's dilemma.

More notably, the author places this round of market volatility within the policy reaction function: when yields approach the 4.50%–4.70% "policy shift zone," the probability of government intervention will increase significantly. Whether it was the historical tariff suspension or the recent changes in the pace of "peace talks," both are interpreted as concrete manifestations of bond market pressure transmitting to the policy level.

This also raises a deeper question: when the bond market begins to dominate asset pricing and policy pace, what signals should market participants follow? Geopolitical narratives, or marginal changes in the yield curve?

In this round of structural transformation, this article attempts to provide a clear answer—watch the bond market. Because it not only reflects risk but also determines the boundaries of risk.

Below is the original text:

As peace talks for the Iran war stall, an urgent question is emerging in US markets: the bond market is "malfunctioning." Amidst severe bond market turbulence, we believe the probability of "intervention" is rapidly rising. What does this mean? Let's explain below.

Before we begin, we recommend bookmarking this article; it will serve as a reference guide for market movements in the coming weeks.

When the Iran war broke out on February 28th (beginning with the US and Israel's assassination of Iran's Supreme Leader Khamenei), oil prices initially rose by less than 15%. The US assessment at the time was that assassinating Khamenei would quickly trigger a regime change in Iran, leading to a relatively swift and less disruptive outcome. But now, 27 days into the Iran war, the US-proposed "15-point peace plan" has been rejected by Iran, and peace talks have clearly stalled.

It is now uncertain whether any party still clearly desires to end this war. Consequently, oil prices remain elevated, with WTI crude again approaching $100 per barrel. But this is no longer the biggest problem facing the market. The real problem has shifted to the bond market, which is rapidly evolving into the largest source of headwinds for the global economy.

Core Issue

In the early stages of the war, oil prices were the market's focus, and they still are. The reason is simple: the oil market reflects the war's impact most directly and quickly.

But now, the bigger problem is: the sudden surge in US Treasury yields.

As shown below, over the 27 days since the Iran war began, the US 10-year Treasury yield has risen from about 3.92% to 4.42%, a cumulative increase of 50 basis points. Remember, before the war broke out, the market's focus was on: how many rate cuts would occur in 2026.

US 10-Year Treasury Yield Since the Outbreak of the Iran War

The current pace of increase in the US 10-year Treasury yield, and the broader rise in US bond yields, is roughly equivalent to the performance during the "Liberation Day" period in April 2025.

But the context this time is far more complex, and stabilizing the bond market is not as simple as it seems on the surface. This will soon become the market's core narrative.

From Rate Cut Expectations to Rate Hike Pressure

To better understand the intensity of this shift, recall market expectations for interest rates at the end of 2025.

As shown below, the market's "base case scenario" at the time was: by 2026, the Federal Reserve's federal funds rate would fall to the 2.75% to 3.00% range. There was even over a 25% probability that rates would fall even lower.

2026 Interest Rate Expectations (Screenshot from September 2025)

Now look at the current pricing in interest rate futures. Today's "base case scenario" shows: rates will essentially remain at current levels until September 2027, with the Fed's federal funds rate expected to be in the 3.50% to 3.75% target range.

This level is 75 to 100 basis points higher than expectations just a few months ago, and this outlook now extends to the end of 2027.

Interest Rate Futures as of March 26, 2026

In fact, the market has already begun discussing the possibility of "rate hikes" again: there is currently about a 43% probability that the Fed will raise rates before the end of 2026. Objectively speaking, the market can hardly withstand such a shock.

Next, let's explain why.

The Labor Market Will Only Get Worse

On September 17, 2025, the Federal Reserve cut rates as widely expected and hinted at two more cuts before year-end. At that time, although inflation was still significantly above the Fed's long-term 2.00% target, concerns about the US labor market were intensifying.

In the post-meeting statement, the FOMC described economic activity as "having slowed" and added that "job gains have moderated," while noting inflation "has risen and remains elevated." Weak employment and rising inflation actually deviated from both of the Fed's dual mandates of "price stability" and "maximum employment," but the labor market issue was more prominent at the time.

Today, the labor market situation has only worsened. Compared to September 2025, the market's ability to withstand higher interest rates is actually weaker now.

The reality is: First, US employment data for 2025 was revised down by a massive 1.029 million jobs, the largest annual downward revision in at least 20 years. Previously, 2024 and 2023 employment data were revised down by 818,000 and 306,000 jobs, respectively.

Cumulatively over the past three years, 2.153 million jobs have been "revised away" from the initially reported figures. Since 2019, a total of 2.5 million jobs have been revised away, and in 6 of the past 7 years, employment data has been revised downward.

Annual Revisions to Non-Farm Payrolls

Here's another example, and there are many similar cases. The average duration of unemployment in the US rose by 2 weeks in February to 25.7 weeks, a 4-year high. Since October 2023, the duration of unemployment has increased cumulatively by 6.3 weeks, the fastest pace since 2020-2021. This level is now significantly higher than pre-pandemic levels in 2018-2019.

US Unemployment Duration Soars

Again, these signs are not isolated; we are seeing persistent and intensifying weakness in the labor market.

In our view, the US economy cannot withstand the 10-year Treasury yield approaching 4.50%, let alone rising above 5.00%.

Why Is All This Happening?

From a macro perspective, the surge in US Treasury yields and the reversal of rate cut expectations can be attributed to one core variable: inflation.

The Fed's "dual mandate" was established by the US Congress in 1977, requiring the central bank to achieve two main objectives through monetary policy: maximum employment and price stability. As mentioned earlier, when the Fed restarted rate cuts in 2025, the Federal Open Market Committee (FOMC) believed that the weakness in the labor market was a "more important" problem compared to still-elevated inflation.

But with rising energy prices, the ongoing Iran war, and the post-war energy recovery cycle being repeatedly extended, inflation has once again become the primary contradiction—not because the labor market has improved, but because inflation itself has become more severe.

US 12-Month Inflation Expectations

As shown above, US inflation expectations for the next 12 months have surged to 5.2%, the highest level since March 2023. Notably, this reversal in expectations began in early January and accelerated rapidly as President Trump threatened Iran, amassed troops in the Middle East, and ultimately launched strikes against Iran on February 28th.

This brings us back to the model-based CPI inflation chart below. As we have repeatedly emphasized since the war began, if oil prices average $95 per barrel over three months, US CPI inflation will rise to 3.2%.

Kobeissi Letter: US Oil Price and Inflation Model

But the reality is, considering the current series of knock-on effects, the rise in inflation is likely to be more than 3.2%.

We Believe "Intervention" Is Imminent

During the severe market volatility triggered by the trade war in early 2025, there was one key factor that ultimately prompted President Trump to announce a 90-day tariff suspension in April 2025—the bond market.

In the chart below, we outline the complete timeline of the rise in US Treasury yields during the so-called "Liberation Day" period. It was this surge in yields that ultimately led to the policy shift on April 9th, alleviating market pressure.

And in a live interview on April 10th, Trump explicitly stated he was closely watching the bond market's movements.

US 10-Year Treasury Yield in April 2025

Thus, it can be seen that the US 10-year Treasury yield in the 4.50% to 4.70% range likely constitutes what we call Trump's "Policy Shift Zone." This level is slightly above the current position, and we largely agree: once yields reach this zone, policy intervention will become necessary to prevent a severe downturn in the US economy.

US 10-Year Treasury Yield, Trump's "Policy Shift Zone"

In our view, this time will be no exception. In fact, we believe the timing of President Trump's announcement of "peace talks" on March 23rd was no coincidence, as shown below.

March 23rd, The First Signal of Intervention

At 4:30 AM ET on March 23rd, we noted: compared to the energy market, the bond market's problems were already more "disorderly." Then, just 2 hours later, with the 10-year yield at 4.45%, President Trump likely engaged in decision-making discussions similar to those on April 9, 2025—when he announced the 90-day tariff suspension.

Another hour later, Trump announced a 5-day delay in strikes on Iranian power facilities and stated that "productive" talks were underway between the US and Iran aimed at ending the war.

This may have been the first signal that intervention had begun.

What Should You Do Now?

The question we receive most often is: what does this mean?

From a macro perspective, we want to emphasize one point: the Trump administration is highly sensitive to volatility in stock, commodity, and bond markets. This is good news for investors—Trump does not want markets to fall, and his focus on this is noticeably higher than previous administrations.

This is also why oil prices, after their initial spike, have remained somewhat contained overall. Crude oil investors widely believe that if oil prices again approach $120 per barrel (as seen early in the war), Trump would quickly intervene.

More broadly, we believe that as the 10-year Treasury yield rises, downward pressure on stocks will intensify; but when yields approach the 4.50% to 4.70% zone we mentioned, the impending policy shift or "intervention" will limit the downside for stocks.

Furthermore, Trump, the Fed, and the entire government understand that the US labor market cannot withstand higher interest rates for long, which also means the current situation is unlikely to evolve into a "long war" and is more likely to see some form of de-escalation or resolution within weeks, not months.

Finally, amidst these fluctuations and noise, we want to emphasize: the AI revolution is only accelerating. Those AI companies that have led the market since 2022 and are now under pressure from the pullback are actually investing more and building faster.

Our view on the stock market and the long-term trend of AI remains unchanged.

Keep Watching the Bond Market

What we are experiencing is not just volatility, but a shift in the "decisive variable."

Over the past few weeks, market attention has focused on oil prices, war news, and geopolitical escalation. But beneath the surface, a more powerful force has been building and is beginning to dominate the situation.

The bond market is once again determining the direction of stocks, commodities, and even policy itself. And history has repeatedly shown that when financial conditions tighten too quickly, the question of intervention is never "if," but "when."

As we have emphasized all year, this market is increasingly like a game of "pattern recognition," where the key is to act one step ahead of the "crowd."

We believe the bond market will become the next most important narrative.

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