The Iran conflict continues to escalate, with high oil prices pushing up inflation expectations. The volatility index for U.S. Treasuries has suddenly surged to a nine-month high, and market bets on the Federal Reserve cutting interest rates in 2026 have nearly vanished.
According to a report by Bloomberg on Friday, the ICE Bank of America MOVE Index, which measures volatility in the U.S. Treasury market and is referred to as the &#34;fear index&#34; of the bond market, has risen to its highest level since June of last year.
Rising oil prices are eroding the real returns on Treasuries, weakening their safe-haven appeal. The yield on 30-year U.S. Treasuries has reached a one-month high, while the 2-year yield has hit its peak since August of last year.
Meanwhile, Trump has once again publicly called for Federal Reserve Chairman Powell to cut interest rates, further exacerbating the uncertainty surrounding monetary policy. The 1-year U.S. inflation swap rate is approaching 3%, indicating that investors expect inflation pressures to continue to strengthen. The Bloomberg U.S. Treasury Total Return Index has nearly erased its gains for the year.
<h2>Conflict Impacts Inflation Expectations, &#34;Fear&#34; Sentiment Spreads in Bond Market</h2>
Since the outbreak of the Iran conflict two weeks ago, government bond prices in major global markets, from the U.S. to Japan and Australia, have generally declined. The upward movement in U.S. Treasury yields has set the tone for the global bond market, with investors betting that central banks may have to raise interest rates earlier to combat inflation.
Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, stated: &#34;As bond investors, we must start thinking from a stagflation perspective, which historically creates significant uncertainty. Therefore, I need to obtain corresponding compensation from a volatility standpoint.&#34;
Both Trump and Iran have taken a hardline stance, making it difficult for outsiders to gauge the duration of the conflict. This uncertainty is one of the core driving forces behind the current volatility in the bond market. Vishwanath Tirupattur, Chief Fixed Income Strategist at Morgan Stanley, said in an interview: &#34;In the face of such widespread uncertainty, I believe volatility will remain high for quite some time.&#34;
<h2>Stagflation Risks Emerge, Rate Cut Expectations Repriced</h2>
As the conflict continues, market concerns about a stagflation scenario are intensifying. BlackRock's Investment Institute has identified stagflation shocks as a major risk scenario, while Loomis, Sayles &amp; Co. has warned that the conflict could threaten the U.S. fiscal deficit, further suppressing bond performance and potentially driving the MOVE index higher.
Bloomberg strategist Alyce Andres noted: &#34;If the situation continues to deteriorate, inflation concerns will further strengthen market expectations for the Federal Reserve to maintain high rates for a longer period.&#34;
Marcella Chow, a global market strategist at JPMorgan Asset Management, also stated: &#34;Any sustained geopolitical tensions, along with limited visibility on the outlook, could place additional pressure on the U.S. fiscal situation, triggering further market concerns.&#34;
Amid rising inflation expectations and geopolitical risks, traders have significantly reduced bets on the Federal Reserve cutting rates in 2026. The 1-year inflation swap rate is nearing 3%, indicating that market expectations for future price pressures have risen significantly.

.VIX

The surge in oil prices has ignited global inflation alarms, with the "panic index" MOVE for U.S. Treasuries soaring to a nine-month high, and the yield on 30-year U.S. Treasuries reaching a one-month high. Market bets on the Federal Reserve cutting interest rates in 2026 have nearly vanished. Under the shadow of stagflation, government bond prices worldwide, from the United States to Japan and Australia, are under pressure, and volatility may remain high for an extended period

- The ongoing conflict in Iran is driving up oil prices and inflation expectations, leading to a surge in volatility in U.S. Treasury bonds, with bets on interest rate cuts by the Federal Reserve in 2026 nearly disappearing.  
- The ICE Bank of America MOVE Index, a gauge of bond market volatility, has reached its highest level since June 2022, influenced by rising U.S. Treasury yields as investors anticipate central banks may raise rates to combat inflation.  
- Concerns over stagflation are mounting as the conflict escalates, prompting major financial firms to reassess the risk landscape, which is intensifying market uncertainty and reducing expectations for interest rate cuts.

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The "fear index" for U.S. Treasuries soared to a nine-month high, and the Federal Reserve's interest rate cut expectations have "cooled off."