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Many bond market bears are wagering on a brightening global economic outlook, after a partial U.S.-China trade deal was agreed late last year, and surprisingly the sudden revival of geopolitical risk in the Middle East this week has barely dented their confidence.
The killing of Iranian general Qassem Soleiman by the U.S. in Iraq last Friday, and the possibility of another Middle East war, has not been enough to push benchmark U.S. Treasury bond yields down to anywhere near the 2019 lows around 1.43% seen in September and inflows into bond funds has been light.
From peak to trough, the 10-year Treasury note yield TMUBMUSD10Y, +0.82% fell from around 1.95% on January 2 last week to as low as 1.76% on Monday after the U.S. airstrike. The benchmark yield was last seen at 1.82% on Tuesday, Tradeweb data show.
The inability of bonds to rack up significant gains in price, or falls in yields, despite the sudden revival of geopolitical risk, reflects widespread optimism about the bottoming-out of global economic growth and “the thesis that domestic sentiment is strong enough to withstand the shock,” said Jon Hill, an interest-rate strategist at BMO Capital Markets.
See: Who was Qassem Soleimani, and why is his death a major development in U.S.-Middle East relations?
The failure of the 10-year note to break below the 1.75% level has led some forecasters to believe long-term bond yields are inclined to head higher this year.
“The lower bound of the [10-year note yield] trading range has continued to grind higher since early September, consistent with the stabilization in economic momentum and optimism around a phase one trade deal,” said Hill.
It’s perhaps no surprise that the escalation of tensions between Iran and the U.S. hasn’t given a more substantial lift to government bond markets. In the past, oil price rises driven by geopolitical risks have rarely left a lasting dent on the U.S. economy, especially since the U.S. has returned to being one of the world’s major oil producers thanks to the fracking and shale oil revolution.
“There’s no satisfactory resolution in the Middle East over any investment horizon, but the lack of clarity this month will pose particular challenges to investors now uncertain how to proceed with their early 2020 strategies,” said Jim Vogel, an interest-rate strategist at FHN Financial.
Given the tension between the U.S. and Iran may take months to play out, worries over a Middle East spat may swiftly drop into the rearview mirror as investors focus instead on the upcoming January 15th signing of a U.S. – China trade deal which may lead to stronger global economic growth.
“Markets have become somewhat resilient to geopolitical uncertainty,” wrote Gregory Faranello, head of U.S. rates at AmeriVet Securities. “Market participants have been rewarded by staying the course” and looking past such fears,” he said.
See also: Esper says no plans to withdraw U.S. troops from Iraq, despite draft letter
