A de-escalation in tensions between the United States and Iran could lead to lower Treasury yields, but Wolfe Research believes rates are unlikely to fall back to the levels seen before the conflict erupted.
In a note released this week, Wolfe Research analyst Stephanie Roth estimated that around half of the nearly 40-basis-point increase in 10-year Treasury yields since the start of the war was driven by the Iran-related shock. The rest of the move, she said, stemmed from stronger economic growth data and the unwinding of a February rally tied to AI-related concerns.
“If/when there is an agreement with Iran, we would not expect yields to return to pre-war levels,” Roth wrote.
According to Wolfe Research, only part of the conflict-related rise in yields is likely to reverse. The firm estimates that “roughly 10–15bp of the war-related move would reverse, with the balance remaining due to firmer growth and a residual risk premium.”
That outlook would keep 10-year Treasury yields trading above pre-conflict levels, in an estimated range of 4.15% to 4.40%.
To assess the increase in yields, Wolfe Research used a sign-restriction model based on daily rate movements. The analysis attributed approximately 19 basis points of the rise to the Iran shock, about 15 basis points to growth repricing, and the remainder to an “other” category.
Roth added that energy prices are expected to remain elevated even if a diplomatic agreement is reached, while lingering geopolitical uncertainty could preserve part of the market’s risk premium. Those conditions, she noted, may prevent a complete reversal in war-related yield gains.
Regarding Federal Reserve expectations, Wolfe Research said the market-implied probability of a rate hike has climbed to roughly 44%. The firm believes that level appears somewhat high relative to its base-case scenario, suggesting there may be room for those expectations to ease, especially if a peace agreement is reached.
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