A senior Barclays investment banker said investors are rapidly withdrawing risky assets due to concerns about the escalation of the Middle East conflict. Stephen Dainton, head of management at Barclays Investment Bank, said, “The rise in geopolitical risk in the Middle East has been evident in the past four or five months, and it has really become apparent. You'll see the escape to safe assets continue.”
US Treasury bonds rose with the dollar on Friday, and Asian stock markets generally declined. Two US officials said Israel attacked targets in Iran less than a week after Iran launched rocket and drone attacks. “They pre-empted risk,” Dainton said. Over the next four to five weeks, as more details about what actually happened today come out, you'll see this evolution continue.”
Demand for safe-haven increased, and US bonds, dollars, and gold have risen sharply
Gold prices once soared above $2,400 an ounce on Friday as concerns about escalating tension between Israel and Iran boosted safe-haven demand. After media reports of explosions in Iran, Syria, and Iraq, the price of gold rose 1.3% for a fifth consecutive week. As of press time, the increase in spot gold narrowed to 0.4% to $2,389 an ounce. The Bloomberg Dollar Spot Index rose 0.2%. Silver, palladium, and platinum also showed gains.
The rhetoric between Iran and Israel has intensified since last weekend's drone and missile attacks. Iran warned against attacking its nuclear facilities and threatened that Iran would trade eye for eye if these facilities were targeted. Meanwhile, the United States urges all parties to exercise restraint.
Second, US Treasury bonds rose along with the dollar, boosting demand for safe-haven assets due to concerns about the escalation of the Middle East conflict. The 10-year US Treasury yield fell as much as 11 basis points to 4.52%, while the US dollar index climbed 0.6% to its highest level since November last year.
Wei Liang Chang, macro strategist at DBS Bank in Singapore, said: “As the situation in the Middle East escalates, long-term US treasury bonds will rebound strongly in safe-haven purchases. If Iran decides to respond to the attacks in another round of escalation, we could see US 10-year Treasury yields fall to 4%.”
The safe-haven boom has given a much-needed boost to US bonds. Previously, the market reconsidered expectations for US interest rate trends, putting tremendous pressure on US bonds. Benchmark treasury yields hit their highest level since November last year due to strong economic data and hawkish remarks from Federal Reserve officials this week.
These include the signal sent by Federal Reserve Chairman Powell — that the Fed is not in a hurry to cut interest rates; and New York Federal Reserve Chairman Williams, the “top three” of the Federal Reserve and has permanent FOMC voting rights, mentioned interest rate hikes, although he does not regard further interest rate hikes as a baseline scenario, and he has not ruled out this possibility, especially if economic data shows that this is necessary.
Keisuke Tsuruta, a senior fixed income strategist at Tokyo-Mitsubishi UFJ Morgan Stanley Securities, said, “This is a textbook-style safe-haven case. Mutual retaliation reminds us that the situation in the Middle East is becoming increasingly tense, and investors are buying bonds to avoid risk.”
Editor/Jeffrey