A potential resolution to the conflict between the U.S. and Iran could send Treasury yields lower, though Wolfe Research believes rates are unlikely to revisit the levels seen before the outbreak of the war.
In a research note published this week, Wolfe Research analyst Stephanie Roth said the firm estimates that about half of the roughly 40-basis-point increase in 10-year Treasury yields since the conflict began can be linked directly to the Iran-related shock. The remainder, according to the analysis, reflects stronger economic growth data and a reversal of the February rally tied to concerns surrounding AI.
“If/when there is an agreement with Iran, we would not expect yields to return to pre-war levels,” Roth wrote.
Wolfe Research expects only part of the conflict-driven move to unwind, estimating that “roughly 10–15bp of the war-related move would reverse, with the balance remaining due to firmer growth and a residual risk premium.”
Under that scenario, 10-year Treasury yields would likely remain elevated relative to pre-conflict levels, trading in a range of about 4.15% to 4.40%.
To analyze the recent increase in yields, Wolfe Research applied a sign-restriction model to daily rate movements. The firm attributed around 19 basis points of the rise to the Iran shock, roughly 15 basis points to stronger growth expectations, and the remainder to an “other” category.
Roth also noted that energy prices are expected to stay relatively high even if a diplomatic agreement is reached, while some geopolitical risk premium is likely to remain embedded in markets. Those factors, she said, could limit the extent of any decline in Treasury yields.
On monetary policy expectations, Wolfe Research pointed out that market-implied odds of a Federal Reserve rate hike have climbed sharply to approximately 44%. The firm believes those expectations may be somewhat overstated relative to its base-case outlook, leaving room for some repricing if geopolitical tensions begin to ease.