The risk aversion demand triggered by the Iran conflict has not pushed funds into U.S. Treasuries as it has in the past. On the contrary, the inflation shock brought by the war, combined with the structural expansion of the U.S. fiscal deficit, is weakening the hedging efficiency of U.S. Treasuries as a global &#34;safe-haven asset.&#34;
According to The Wall Street Journal, the U.S. stock market still saw a slight rise on Monday, continuing the market's inertia of &#34;buying the dip&#34; after unexpected negative news. However, the bond market performed poorly, with U.S. long- and short-term Treasury yields continuing to rise since the market opened on Monday, indicating that Treasuries have failed to provide the traditional buffer under pressure.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/ee871798-35ee-474a-97dd-89d5fbaf011c.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/ee871798-35ee-474a-97dd-89d5fbaf011c.png"/>
The volatility of risk assets is first reflected overseas. Last year, South Korea's main stock index, which performed the best globally, had previously risen by 92%, but under concerns about the economic spillover effects of the war, it experienced its largest overnight drop since 2008. U.S. stock index futures fell sharply at one point but had turned upward before the market opened.
Factors driving the weakness of U.S. Treasuries include not only the inflation concerns brought by rising oil prices but also the continuous squeeze on U.S. fiscal space. Last month, the Congressional Budget Office raised its deficit forecast for the next decade by $1.4 trillion, prompting investors to reassess the boundaries of &#34;risk-free&#34; pricing.
<h2>Safe-haven logic challenged, Treasury's &#34;shock absorber&#34; role fails</h2>
The core reason investors are willing to accept lower returns on U.S. Treasuries is that they typically serve as a &#34;shock absorber&#34; during risk events. In a typical scenario, if the stock market retracts by 10%, as long as bonds rise by about 3%, the classic 60/40 stock-bond portfolio loss can be controlled within 5%.
However, this time, bonds did not rise as expected. Long-term Treasury ETFs fell by 1% on Monday and continued to decline on Tuesday, while the stock market began to more fully account for the possibility of an extended conflict. This combination of &#34;stocks stabilizing first, bonds falling first&#34; challenges the hedging logic itself.
<h2>Rising oil prices boost inflation, making it harder for central banks to cut rates</h2>
Sustained rising oil prices will boost inflation, prompting investors to demand higher yields, thereby pushing down bond prices. Even if energy shocks may drag down growth and traditionally lead to expectations of rate cuts, the policy response may be more cautious.
According to The Wall Street Journal, due to concerns about a repeat of the stagflation of the 1970s, central banks may be reluctant to easily cut rates in the face of energy shocks.
This contrasts with the typical response after non-energy shocks; historically, bonds have shown significant rebounds after shocks such as the 9/11 attacks, the collapse of Lehman Brothers, and Brexit; whereas in the context of Iraq's invasion of Kuwait in 1990, rising oil prices triggered a recession, bond prices also faced pressure beforehand.
<h2>High deficits exacerbate bond market vulnerability</h2>
Oil prices may not be the only variable. The U.S. fiscal situation is already &#34;stretched&#34;: last month, the Congressional Budget Office raised its deficit forecast for the next decade by $1.4 trillion. The federal deficit as a percentage of economic output has reached a rare high since World War II during non-recession periods.
At the same time, the scale of U.S. debt held by the public is about to cross the threshold set during World War II. During World War II, &#34;the public&#34; primarily referred to domestic savers in the United States; today, overseas creditors from the Middle East and Asia hold a significant share of U.S. Treasury bonds and may be concerned about the impact of conflicts on their domestic economies.
In this structure, U.S. Treasury bonds need to prove their attractiveness to global capital, and the sensitivity in terms of interest rates and exchange rates has also increased.
<h2>Historical Reflection: Rising Yields During the Vietnam War, WWII-style &#34;Interest Rate Suppression&#34; Difficult to Replicate</h2>
Historical experience suggests that the combination of war and fiscal expansion does not always favor government bonds. Even during the Vietnam War, when the U.S. was less reliant on overseas financing, bond yields rose as Washington simultaneously advanced the &#34;War on Poverty&#34; and actual warfare.
The reason U.S. Treasury yields remained moderate during World War II, as noted by The Wall Street Journal, was due to the collaboration between the Treasury and the Federal Reserve to &#34;suppress&#34; yields, at the cost of diluting returns for savers.
However, in the current environment of free capital movement, if the market fears a return to a similar &#34;fiscal dominance,&#34; it could trigger investor unease and weigh on the dollar.
Risk Warning and Disclaimer
Markets are risky, and investments should be made with caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment decisions made based on this are at the user's own risk

511010

The Iran conflict has failed to drive funds into U.S. Treasuries; instead, the inflation and expansion of the U.S. fiscal deficit caused by the war have weakened the safe-haven effectiveness of U.S. Treasuries. The U.S. stock market rose slightly, but the bond market performed poorly, with Treasury yields continuing to rise, failing to provide the traditional risk buffer. Investor confidence in U.S. Treasuries is being challenged, rising oil prices exacerbate inflation, and central banks may be reluctant to easily cut interest rates, leading to pressure on bond prices

- The conflict in Iran has shifted risk-averse investment away from U.S. Treasuries, weakening their effectiveness as a safe-haven asset amid rising inflation and structural fiscal deficits.  
- While the U.S. stock market experienced a slight rebound on Monday, bond yields continued to climb, indicating that Treasuries failed to provide expected protection during market stress.  
- Ongoing concerns about inflation from rising oil prices complicate potential interest rate cuts by central banks, as fiscal pressures and heightened deficits challenge bond market stability.

Wallstreetcn

iShares Barclays Short Treasury

iShares Core US Aggregate Bd

Guotai SSE 5-Year China Treasury Note ETF

Vanguard Total Bond Market ETF

Vanguard Short Term Bd

iShares Barclays 1-3 Yr Treasury

iShares iBoxx  Invt

Pengyang Chinabond 30-year Treasury Bond ETF

ISHRS Us Trsry Bd

Texas Capital Government Mny Mkt ETF

Fullgoal S&P Oil & Gas Exploration & Production Select Industry ETF(QDII)

Schwab 5-10 Year Corp Bond ETF

SPDR Energy Select

VanEck Oil Services ETF

iShares US Oil & Gas Expl & Prod

Vanguard Long Term Bd

ChinaAMC CNI Oil&Gas ETF

iShares 0-3 Month Treasury Bond ETF

Pmco Enh Shrt Maturity

Pingan Chinabond-0-3 Year CDB Bond ETF

Pro Ultr Bloomberg Crude Oil

iShares Trust iShares 1-5 Year Invest Grade Corp Bond ETF

United States Oil Fund LP

SPDR O&G Ex & Prd

SPDR Intermed Term

iShares barclays 20+ Yr Treasury Bd

Vanguard Intermediate Term Bd

iShares 7-10 Year Treasury Bond ETF

SPDR Bloomberg 1-3 Month T-Bill ETF

Fullgoal Chinabond 7-10 Year Policy Bank Bond ETF

The myth of U.S. Treasury bonds as a safe haven is quietly shaking under the weight of war and massive deficits