Middle East tensions escalate again, sparking inflation concerns; U.S. Treasuries sold off, with two-year yield rising to a one-week high.

Title context: Middle East tensions escalate again, sparking inflation concerns; U.S. Treasuries sold off, with two-year yield rising to a one-week high. Text: As news emerged that the Middle East conflict could escalate further, international oil prices rose rapidly, triggering market concerns that global inflationary pressures may intensify again. U.S. Treasuries were sold off on Wednesday, with yields across maturities climbing broadly, and short-term Treasury yields rising particularly sharply. Meanwhile, the dollar strengthened, reflecting investors reassessing the potential impact of geopolitical risks on inflation and Federal Reserve monetary policy. During Wednesday's trading session, the U.S. Treasury market was relatively calm for most of the day, but around 2:45 p.m. New York time (2:45 a.m. Beijing time on October 22, 2026), the market suddenly showed pronounced volatility. At that time, U.S. West Texas Intermediate (WTI) crude oil futures rose rapidly from about $97 per barrel to around $98.50, pushing Treasury yields to intraday highs. The two-year U.S. Treasury yield rose as much as 5 basis points to 4.83%, the highest level in a week. Because Treasury prices move inversely to yields, the rapid rise in yields means investors are selling U.S. Treasuries. At the same time, major U.S. stock indexes also briefly fell, while the dollar strengthened somewhat. The market move was mainly driven by a report on the Middle East situation. According to the report, the United States was preparing to require some embassy staff in the Persian Gulf region to evacuate. Because the United States and Iran had erupted into military conflict in February this year, the news quickly sparked concerns that regional tensions could escalate again. However, as U.S. officials later clarified that the evacuation order involved only Saudi Arabia, market tensions eased somewhat, and some of the price moves initially triggered by the news also faded. John Briggs, head of U.S. rates strategy at Natixis North America, said Iran-related risks have in fact never completely disappeared. If the market becomes concerned again about an escalation of the conflict, global bond yields could once again face upward pressure, because higher energy prices would increase inflation risks and could prompt investors to further raise expectations for central bank policy rates. In fact, since the Middle East war broke out in mid-February this year, international oil prices have continued to rise, rekindling global inflationary pressures and prompting the Federal Reserve and other major central banks to raise interest rates. For the bond market, the impact of rising oil prices is particularly complex. On the one hand, geopolitical risks usually drive investors to buy safe-haven assets such as U.S. Treasuries; on the other hand, if energy prices continue to rise and exacerbate inflation, the market may expect central banks to adopt tighter monetary policy, thereby pushing Treasury yields higher. At present, the latter factor is clearly weighing on the U.S. Treasury market. U.S. Treasury yields remain near multi-year highs touched earlier this month. Previously, expectations for strong U.S. economic performance, continued expansion of government debt, and further Federal Reserve rate hikes had combined to push Treasury yields higher. With international oil prices rising again, investors have become more cautious in their assessment of the Federal Reserve's monetary policy outlook. The Federal Reserve will announce its next interest rate decision on October 28, and officials have now entered the routine quiet period before the policy meeting. Based on interest rate market pricing, traders expect about a 20% probability that the Federal Reserve will raise rates at this meeting. Although this probability has not yet become the market's mainstream expectation, the Middle East situation and changes in energy prices could still influence investors' judgments on the future rate path. Meanwhile, the U.S. Treasury market is also facing pressure from new debt issuance. In Wednesday's auction of 20-year U.S. Treasuries, the high yield reached the highest level for comparable auctions since the U.S. Treasury resumed issuing that maturity in May 2020, highlighting that current long-term financing costs are at elevated levels. In addition to inflation and debt supply factors, the performance of U.S. stocks is also affecting Treasury market trends. U.S. stocks rose on Wednesday, briefly weakening investors' safe-haven demand for Treasuries and further pushing yields higher. However, after news about the Middle East situation emerged, the stock rally was briefly hit. It is worth noting that the relationship between the U.S. stock market and the bond market has also changed recently. Over the past two weeks, share prices of U.S.-listed companies related to artificial intelligence (AI) infrastructure capital expenditure have fallen sharply, raising market concerns about whether massive AI investment can continue to generate sufficient profits. At the same time, some investors have begun to worry that U.S. economic growth may slow, so even as international oil prices continue to rise, funds are still flowing into U.S. Treasuries in search of safety. This flow of funds shows that the bond market is currently being pulled by multiple factors. On the one hand, rising energy prices, inflationary pressures and expectations of Federal Reserve rate hikes are weighing on bond prices; on the other hand, the correction in technology stocks and risks of an economic slowdown may stimulate safe-haven demand. Overall, the Middle East situation has once again become an important variable affecting global financial markets. As international oil prices approach the upper end of their trading range since February this year, investors will closely watch whether the conflict escalates further and whether rising energy prices will prompt the Federal Reserve to maintain a tighter monetary policy stance. Before the Federal Reserve's October 28 rate decision is announced, oil price trends, geopolitical news and the market's repricing of the inflation outlook are expected to remain important factors affecting U.S. Treasury yields and dollar performance.