Yields, Gold, and Chickens

You can’t win a game of chicken against someone with nothing to lose. Iran is facing an existential threat and has spent four decades preparing for asymmetric warfare. It appears to have neither the intention to de-escalate nor the incentive to stop targeting the Gulf’s exposed energy infrastructure. That reality seems to have finally sunk into financial markets last week.

Oil prices are getting painfully comfortable above $100 a barrel. Equities are drifting towards correction territory, but the real damage has been in bond markets, where yields have surged sharply. In the US, Treasuries are no longer pricing in two rate cuts. In Europe, Gilts and Eurobonds have gone even further, with markets now expecting multiple rate hikes over the next twelve months.

All of which has prompted investors to seek protection where they can. Unfortunately, there has been no help from precious metals. Gold is down 20% and silver nearly 35% since the first of March, in yet another reminder that when correlations go to one, true safe havens are hard to come by. Insurance has also become prohibitively expensive, with equity and bond market volatility indices now at highly elevated level.

Time to sell and wait for clarity? Perhaps. But the difficulty is not getting out, it is knowing when to get back in. Things may get worse before they improve in the short term, but markets rarely wait for certainty. Sharp reversals tend to happen when positioning is most defensive. If there is any shift in tone, whether through de-escalation, negotiation, or simply fatigue, risk assets could rebound just as quickly as they fell.