The bond market sold off steadily and gradually overnight session despite news of escalation between Iran and Israel.  Ever since the start of the war in Ukraine, we’ve seen a different reaction function than we’re used to when it comes to geopolitical turmoil.  Inflation is the x factor as armed conflict can either suggest supply chain issues or imply increased government spending (which in turn implies Treasury issuance and incremental bond market weakness.  10yr yields were already up 5+ bps by the open.  After this morning’s strong Retail Sales data and additional headlines, the losses have more than doubled.

It is interesting to consider the role of oil prices vs bond yields when it comes to assessing geopolitical headlines that involve oil producing countries.  Correlated movement in bonds and oil can help confirm geopolitical motivations, but not always in a logical way.  In the chart below, volatility in oil and bonds does seem to correlate with geopolitical headlines, but note that the 2nd spike in oil only restored levels from earlier in the morning.

Zooming out to a slightly wider time horizon, we can see that oil prices haven’t been moving much recently AND that most of the movement has been positive correlated with yields (as opposed to today’s apparent inverse correlation).