Treasuries: Iran Crisis Drives Flight to Safety

Treasury yields have declined across every maturity in February, with the benchmark 10-year note leading the move. From 4.18% on February 11, the 10-year yield has fallen 16 basis points to 4.02% — its lowest level since late January.

The 30-year bond has seen an even larger absolute decline, dropping 15 basis points from 4.82% to 4.67%. The long end of the curve is particularly sensitive to flight-to-safety flows because institutional investors and pension funds increase duration exposure during periods of geopolitical uncertainty.

The 10-year/2-year spread has narrowed slightly to 59 basis points from 62 basis points two weeks ago. This compression suggests that the front end is not falling as quickly as the belly and long end — a pattern consistent with markets pricing near-term inflation risk from oil prices while expecting longer-term growth headwinds from the conflict. For a deeper dive on what the current [yield curve spread signals for your portfolio](/articles/treasury-yield-curve-what-the-spread-tells-you-now), see our latest analysis.

The average interest rate on total U.S. interest-bearing debt stood at 3.316% as of January 31, with marketable securities averaging 3.348%. Treasury bills carry an average rate of 3.76%, while notes average 3.169% and bonds 3.369%. These government borrowing costs remain elevated by historical standards, though the current rally is gradually easing the marginal cost of new issuance.

The immediate catalyst for the latest leg of the Treasury rally is the U.S.-Israeli military operation against Iran. Reports confirm nine deaths in missile attacks on Israel as Iran struck back across the region, while three U.S. service members were killed and five wounded according to CENTCOM.

The most critical market implication is the threat to the Strait of Hormuz. Three ships have been attacked near the strait as fears grow of oil price disruption. Approximately 20% of the world's daily oil supply passes through this narrow waterway, and any sustained disruption would send energy prices sharply higher.

This creates a paradoxical dynamic for Treasuries. On one hand, safe-haven demand is pushing yields lower. On the other, a sustained oil shock would be inflationary — which would eventually push yields higher. For now, the flight-to-safety impulse is dominant, but bond investors must watch oil markets closely for signs that the inflation channel could overwhelm the safe-haven bid.

The killing of Iran's Supreme Leader has triggered a succession crisis, adding another layer of uncertainty. Congress remains divided on the military action, and world leaders are urging a return to diplomatic talks. The longer the conflict persists, the more deeply it will reshape bond market positioning.

The Federal Reserve has been steadily easing monetary policy, providing a structural backdrop that supports Treasury prices. The effective federal funds rate has declined from 4.33% in August 2025 to 3.64% in January 2026 — a 69 basis point reduction over five months.

The pace of easing has decelerated — the 8 basis point cut from December to January was the smallest in the cycle — suggesting the Fed is approaching a pause point. Markets are watching for signals on whether the Iran conflict and its economic spillovers could influence the Fed's rate path.

If oil prices surge and inflation re-accelerates, the Fed faces a difficult choice: pause easing to fight inflation, or continue cutting to support growth that could be undermined by a geopolitical shock. This uncertainty is itself supportive of Treasury demand, as investors seek the safety and liquidity that only the U.S. government bond market can provide.

The consumer price index reached 326.588 in January 2026, up from 323.291 in August 2025. While inflation has moderated significantly from its 2022–2023 peaks, the month-over-month increases remain above the Fed's 2% annualized target, leaving limited room for aggressive easing if oil prices add new inflationary pressure.

The Iran crisis has reinforced the U.S. Treasury's role as the world's premier safe-haven asset. While other sovereign bond markets have also benefited from risk-off sentiment, the depth, liquidity, and reserve currency status of the Treasury market make it the primary destination for capital seeking safety.

Foreign central banks and sovereign wealth funds have been net buyers of Treasuries during periods of geopolitical stress, and the current conflict is likely accelerating this trend. The dollar's reserve currency status means that even nations critical of U.S. foreign policy continue to hold substantial Treasury reserves.

The Treasury market's average interest rate on TIPS stands at 0.983%, implying that real yields remain close to 1%. This is significantly above the negative real yields that prevailed during 2020–2022, providing genuine income for inflation-conscious investors. For investors considering inflation-protected options, our guide on [how TIPS work and when to buy them](/articles/tips-how-us-inflation-protected-treasury-bonds-work) covers the mechanics in detail.

The contrast with emerging market debt is stark. Nations with direct exposure to Middle Eastern oil supply — whether as importers or as regional economies — are seeing capital outflows that benefit Treasury demand. This reallocation pattern has historically persisted for weeks to months after major geopolitical shocks.