U.S. Treasury yields remain elevated after Iran conflict ends

U.S. Treasury bond yields have risen during the Iran conflict but may continue climbing after the war ends, according to two Wall Street economists. Mark Zandi, Moody's Analytics chief economist, said Treasury yields increased because of higher inflation expectations tied to the war and because of a larger federal budget deficit.

"Treasury yields have jumped in big part due to the Iran War and the resulting increase in inflation expectations, but also to the ballooning federal budget deficit and surge in Treasury securities issuance necessary to finance it," he wrote. Zandi noted that monthly Treasury issuance has reached almost 10 percent of GDP.

He added that traditional buyers such as the central bank, banks, and large overseas investors have reduced purchases, leaving hedge funds as the main new buyers.

Torsten Sløk, Apollo Global Management's chief economist, said three separate forces are pushing rates higher across the yield curve. He cited persistent inflation from the Middle East conflict, increased corporate bond issuance, and reduced central-bank demand for long-term Treasuries.

"The bottom line is that three distinct forces are pushing rates higher across the curve, and investors should position for a persistently higher rate environment," Sløk said.

The 30-year Treasury yield remained above 5 percent on Tuesday.