Iran War Fuels Oil Rally and Bond Selloff: Treasuries, Gilts Slide as Inflation Fears Mount

The Iran conflict has become a macro game-changer, shifting markets from rate-cut optimism to stagflation fears. With 20% of global oil flowing through the Strait of Hormuz now effectively blocked by tensions, crude oil is holding above $80 and headed for a weekly gain. More critically, the spillover into commodity inflationThe rate at which prices rise across an economy. is creating a policy dilemma: central banks cannot cut rates into rising energy prices without triggering a currency crisis and broader price spiral.

US Treasuries led a global bond rout, with yields climbing as back-to-back inflationThe rate at which prices rise across an economy. reports spooked investors. The 10-year yield surged and the Fed's December 2026 rate-cut expectations moved further out. Gilts tumbled after political instability (Manchester Mayor Andy Burnham challenging Prime Minister Keir Starmer) added domestic policy risk on top of inflation concerns. Japan's government bond yields marched to multi-year highs as elevated oil prices fuel concerns about imported inflation, validating the Bank of Japan's recent rate hike.

Gold, normally a beneficiary of inflationThe rate at which prices rise across an economy. fears, is heading for a weekly decline as the inflation narrative is shifting from 'transitory supply shock' to 'structurally higher for longer,' which argues for higher real rates and a stronger dollar. This dynamic pressures emerging markets, whose currencies are weakening as USD strength accelerates. Malaysia and India are defending their currencies through interventions and yield adjustments, but the fundamental driver (higher US real rates) is beyond their control.

The energy sector benefits from crude strength, but energy importers (EU, Japan, India, parts of Asia) face margin compression. Airlines, already battered by fuel hedging losses, are becoming cheaper to own in absolute terms, but only as a value trap if fuel prices remain elevated. The real winners are energy exporters (Saudi Arabia, UAE, Norway) and defense stocks, which benefit from elevated geopolitical risk premiums.