UBS warns: Under Iran conflict, bond traders are betting on the "2022 script," but this time they could be very wrong

Zhitong Finance APP learned that Bhanu Baweja, Chief Strategist at UBS Group, said that traders are betting that major central banks will take coordinated action to address the long-running threat from Iran’s prolonged conflict, but this expectation could lead them to misjudge the situation.

In an interview, Baweja said, “The way the market is pricing is like it’s back to 2022, believing that all central banks will act in sync, but now the situation is completely different.” He also said that what’s more likely is a so-called “asymmetric” scenario, where the European Central Bank, the Federal Reserve, and the Bank of England will respond with differentiated measures.

The strategist believes that U.S. Treasuries and U.K. government bonds in particular reflect an unrealistic expectation—that inflationary pressure will prompt central banks to launch yet another round of rate hikes similar to 2022. Since Iran’s conflict broke out at the end of February, the market has increased its bets on rate hikes by major economies, driving government bond yields higher.

Baweja believes that investors willing to go against the trend may instead find value in short-term bonds experiencing the fastest rise in yields. The turmoil in the fuel market is more likely to weaken the economy, so central banks will not take further rate-hike measures to slow economic growth.

Baweja said, “At the front end of the fixed-income market, especially in the U.K. and the U.S., value is being created.”

On Tuesday, European bonds fell, with short-term bonds leading the decline, and the money market further increased bets on tighter policy. The yield on Germany’s two-year government bonds rose by 6 basis points to 2.68%. U.S. bonds across all maturities also declined.

Currently, the market is weighing signs that Middle East tensions may ease, against the threats issued by U.S. President Trump—if an agreement is not reached before the 8:00 p.m. EDT deadline on Tuesday, he will escalate strikes on Iran’s infrastructure.

Baweja said that in the event the conflict is resolved quickly, bonds will remain in a position of strength.

He noted, “If the situation turns positive, then fixed-income products—especially short-term products—will perform much better than when the situation worsens.”

(Editor: Liu Chang)

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