U.S. Treasury "Fear Index" soars to a nine-month high, as expectations for Fed rate cuts cool off

The conflict in Iran continues to escalate, pushing oil prices higher and boosting inflation expectations. The US Treasury volatility index suddenly surged to a nine-month high, and market bets on a Fed rate cut in 2026 have nearly disappeared.

According to Bloomberg on Friday, the ICE Merrill MOVE Index—which measures US bond market volatility and is known as the “fear index” of the bond market—has risen to its highest level since June last year.

Rising oil prices erode real returns on government bonds, weakening their appeal as a safe haven. The 30-year US Treasury yield rose to a one-month high, while the 2-year yield hit its highest since August last year.

Meanwhile, Trump publicly called on Federal Reserve Chair Powell to cut interest rates again, further increasing uncertainty about monetary policy prospects. The 1-year US inflation swap rate approached 3%, indicating investors expect inflation pressures to persist. The Bloomberg US Treasury Total Return Index has nearly erased its gains for the year.

Conflict impacts inflation expectations, spreading “fear” in the bond market

Since the outbreak of the Iran conflict two weeks ago, government bond prices have generally fallen across major markets from the US to Japan and Australia. The rise in US bond yields has set the tone for global bond markets, with investors betting that central banks worldwide may need to raise interest rates earlier to combat inflation.

Jack McIntyre, portfolio manager at Brandywine Global Investment Management, said: “As bond investors, we need to start thinking from a stagflation perspective, which historically creates great uncertainty. Therefore, I need compensation for this volatility.”

Both Trump and Iran have taken tough stances, making it difficult to predict how long the conflict will last. This uncertainty is one of the core drivers of current bond market volatility. Vishwanath Tirupattur, Chief Fixed Income Strategist at Morgan Stanley, said in an interview: “Given such widespread uncertainty, I believe volatility will remain high for quite some time.”

Stagflation risks emerge, and rate cut expectations are being re-priced

As the conflict continues, concerns about stagflation are intensifying. BlackRock Investment Institute has listed stagflation shocks as a primary risk scenario, while Loomis, Sayles & Co. warned that the conflict could threaten US fiscal deficits, further suppress bond performance, and potentially push the MOVE index higher.

Bloomberg strategist Alyce Andres noted: “If the situation worsens, inflation fears will further reinforce market expectations that the Fed will keep interest rates high for longer.”

JPMorgan Asset Management global market strategist Marcella Chow also said: “Any ongoing geopolitical tensions and limited visibility on the outlook could add additional pressure on US fiscal conditions, triggering further market concerns.”

Amid rising inflation expectations and geopolitical risks, traders have significantly reduced their bets on a Fed rate cut in 2026. The 1-year inflation swap rate approaching 3% indicates that market expectations for future price pressures have risen sharply.

Risk Warning and Disclaimer

Market risks exist; invest cautiously. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest at your own risk.