Iran War Triggers Economic Uncertainty, Credit Concerns Persist | Real Yield 3/27/2025

Escalating tensions from the Iran conflict have heightened geopolitical risk premiums, driving safe-haven flows into U.S. Treasuries and compressing real yields despite elevated credit market stress. The regional war risk has disrupted energy shipping lanes, contributing to a spike in crude oil prices, which amplifies inflationary pressures and complicates central bank policy normalization efforts. This has strained credit conditions, particularly in emerging markets with energy import dependencies and elevated external debt, increasing default risks and prompting downgrades in sovereign credit ratings. The flight to quality is most evident in 10-year TIPS yields, which have declined even as corporate bond spreads widen on deteriorating loan performance. Traders will closely watch the next U.S. CPI print on April 10 for signals on whether inflation expectations are unanchoring amid supply chain disruptions.

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