To The Moon

With news emerging that the Middle East conflict could escalate further, international oil prices surged rapidly, triggering concerns that global inflationary pressures may intensify once again. U.S. Treasuries came under selling pressure on Wednesday, with yields across maturities broadly climbing, and short-term yields posting particularly notable gains. Meanwhile, the dollar strengthened, reflecting that investors are reassessing the potential impact of geopolitical risk on inflation and the Federal Reserve's monetary policy.

During Wednesday's trading session, the U.S. Treasury market was relatively calm for much of the day, but around 2:45 p.m. New York time (2:45 a.m. Beijing time on October 22, 2026), sharp moves suddenly appeared. At that point, U.S. West Texas Intermediate (WTI) crude futures quickly rose from about $97 per barrel to near $98.50, pushing Treasury yields to their intraday highs. The two-year U.S. Treasury yield briefly rose 5 basis points to 4.83%, the highest level in a week. Because bond prices and yields move in opposite directions, a rapid rise in yields means investors are selling U.S. Treasuries. At the same time, major U.S. stock indexes also briefly fell, while the dollar strengthened somewhat.

The market fluctuation was mainly driven by a report concerning the Middle East situation. However, as U.S. officials later clarified that the relevant evacuation order involved only Saudi Arabia, market tension eased somewhat, and part of the initial price swing triggered by the news also faded. John Briggs, head of U.S. rates strategy at Natixis North America, said Iran-related risks have in fact never fully disappeared. If the market becomes worried again about an escalation of the conflict, global bond yields could face upward pressure once more, because higher energy prices would raise inflation risk and could prompt investors to further raise their expectations for central bank policy rates.

In fact, since the Middle East war broke out in mid-February this year, international oil prices have continued to rise, reigniting global inflationary pressures and prompting the Federal Reserve and other major central banks to raise interest rates. For the bond market, the impact of higher oil prices is especially complicated. On one hand, geopolitical risk usually drives investors to buy safe-haven assets such as U.S. Treasuries; on the other hand, if energy prices continue to climb and worsen inflation, the market may expect central banks to adopt more tightening monetary policy, pushing Treasury yields higher. At present, the latter factor is clearly weighing on the U.S. Treasury market.

U.S. Treasury yields remain near multi-year highs touched earlier this month. Previously, market expectations for strong U.S. economic performance, continuously expanding government debt, and further Federal Reserve rate hikes had jointly pushed Treasury yields higher. With international oil prices rising again, investors have become more cautious in judging the Fed's monetary policy outlook. The Federal Reserve will announce its next interest rate decision on October 28, and officials have now entered the routine quiet period before the policy meeting. Based on interest rate market pricing, traders expect about a 20% probability that the Fed will raise rates at this meeting. Although this probability has not yet become the market's mainstream expectation, Middle East developments and changes in energy prices could still influence investors' judgment of the future rate path.

Meanwhile, the U.S. Treasury market also faces pressure from new debt issuance. In Wednesday's auction of 20-year U.S. Treasuries, the awarded yield reached the highest level for comparable auctions since the U.S. Treasury resumed issuing that maturity in May 2020, highlighting that current long-term financing costs are at elevated levels. Besides inflation and debt supply factors, U.S. stock performance is also affecting Treasury market moves. U.S. stocks rose on Wednesday, temporarily weakening investors' safe-haven demand for Treasuries and further pushing yields higher. However, after news about the Middle East situation emerged, the stock rally was briefly disrupted.

It is worth noting that the relationship between the U.S. stock and bond markets has also changed recently. Over the past two weeks, share prices of U.S. listed companies related to artificial intelligence (AI) infrastructure capital spending have fallen sharply, raising market concerns about whether massive AI investment can continue to generate sufficient profits. At the same time, some investors have begun to worry that U.S. economic growth may slow, so even if international oil prices continue to rise, some funds are still flowing into U.S. Treasuries in search of safety. This flow of funds shows that the bond market is currently being pulled by multiple factors. On one hand, higher energy prices, inflation pressure, and Fed rate hike expectations weigh on bond prices; on the other hand, a correction in technology stocks and the risk of an economic slowdown may stimulate safe-haven demand.

Overall, the Middle East situation has once again become an important variable affecting global financial markets. As international oil prices approach the upper end of their fluctuation range since February this year, investors will closely watch whether the conflict escalates further and whether higher energy prices will prompt the Federal Reserve to maintain a more tightening monetary policy stance. Before the Fed's October 28 interest rate decision is announced, oil price trends, geopolitical news, and the market's repricing of the inflation outlook are expected to remain important factors affecting U.S. Treasury yields and the dollar's performance.