We’ve seen a remarkable calming in circumstances over the first full day of market trading in the wake of the US/Israel attacks on Iran. The impact effect was dramatic, as volatility spiked, risk assets sold off, spreads widened, bond yields fell and the US dollar rallied. As Monday rolled on, that initial spike unwound, practically completely in many cases. We don’t typically do running commentaries on the markets, but here it’s important, as many of Monday’s market moves portrayed a preliminary market impression that “we’ve seen this movie before.” For example, the VIX volatility index was pared right back down to where it closed on Friday, CDS-based credit spread indices narrowed right back in to close to Friday’s levels (albeit still a tad above), and the 10yr Treasury yield snapped right back above 4% (having initially dipped below 3.95% in the early morning).
But there are other areas where impact moves have been broadly sustained. For example, the price of oil snapped higher, and has remained elevated (albeit off the highs), and the dollar has managed to hold on to a reasonable bid, and inflation breakevens spiked higher, and that too has been broadly sustained. Then again, the moves have not been that dramatic. The oil price, for example, is up, but from US$67/bbl on Friday to US$71.5/bbl as we head to the close on Monday. Hardly dramatic. The 2yr US breakeven inflation rate ended Friday at 2.8% and is now at 2.9%. Two things there. First, it was already relatively high, and second, the Iranian attacks have added to them, but only by 10bp. Moreover, the 10yr US breakeven rate is up just 3bp, to a relatively benign 2.3% (a level that Chair Powell impliedly is comfortable with).
Frankly, we’ve been surprised that the safety flight into bonds was as short as it was. We can, of course, reverse engineer a rationale as to why the 10yr Treasury yield popped back above 4% (inflation fears). Should circumstances become more sinister from a wider lens across the region, there would no doubt be a renewed safety flight. But the impact reaction following on from the initial impact reaction has been remarkable.