CITIC Securities | Comparison of U.S. Treasury declines: US-Iran vs. tariffs last year

By Qian Wei

After the tariffs last year, the yield middle range on U.S. Treasuries was raised and did not fall back, showing long-term effects. What about this round—how should we view it?

Compare the following dimensions:

① Curve changes: Last year, rate-cut expectations were suppressed relatively less; the main pressure came from heavy selling in the long end. This year, tightening-expectation concerns are the dominant driver, and the drop spreads from the short end toward the long end; ② Valuation impact: Last year, the term premium widened sharply, and there was a credibility crisis for U.S. Treasuries. This time, it is not the case; ③ Liquidity: Last year, demand collapsed out of panic. This time, the deterioration is limited in comparison; ④ Inflation expectations: Oil prices have surged now, but medium- to long-term inflation expectations have fallen significantly instead. The market is wary of potential recession risks.

Conclusion: First, the core drivers of the current selloff are fundamentally different from those during the tariff period last year. Last year was about valuation and credibility issues; this time is based more on fundamentals. Second, the volatility in yields this time looks more like a cyclical pattern (tends to ease) rather than a structural one (moving into a higher range). Third, regardless of whether subsequent developments worsen (or improve), further downside in yields is still worth expecting.

The yield on the 10-year U.S. Treasury continues to hover around 4.5%. How should we look at the outlook going forward?

This round’s decline in U.S. Treasuries leads the market to associate it with last year’s tariff-driven shock and the subsequent bear market. Back then, once the yield middle range rose, it did not fall back. Will this time be similar?

In terms of U.S. Treasury pricing, the U.S.-Iran shock and the tariff shock are similar in many aspects, such as inflation, Trump’s credibility, U.S. credibility, and so on. After last year’s “tariff liberation day,” the 10-year U.S. Treasury yield not only rose to its highest point by more than 40–50bp, but more importantly, in hindsight, this was not a one-off shock to the U.S. Treasury; the yield middle range shifted upward overall and did not revert afterward. This indicates that U.S. Treasury pricing suffered a long-lasting negative impact.

Recently, as U.S. Treasuries have fallen again, if the logic is similar to last year’s tariff episode, there is limited upside room for buying the dip in U.S. Treasuries. Once yields rise, they are not as likely to fall back easily. But if the logic is different, then a decline in yields can still be expected.

Focus on the following perspectives:

(1) Curve changes: In last year’s tariff episode, the convergence of rate-cut expectations was limited, so short-end Treasuries did not drop much. The main selloff impact was concentrated in intermediate- and long-term maturities. By contrast, this round’s decline in U.S. Treasuries has clear features of heightened worries about additional rate hikes and short-end catalysts, with fundamentals-driven disruptions being the main factor.

After “tariff liberation day,” CME futures pricing showed that the 2025 rate-cut expectations fell only by about 20–30bp, and the yield on the 2-year U.S. Treasury rose by less than 10bp. The selloff magnitude generated by this short-end change from rate hikes is therefore very limited. However, yields on the 10-year and 30-year maturities rose by about 40–60bp, making the selloff in ultra-long Treasuries the mainstream narrative.

Conversely, the main reason for the current decline in U.S. Treasuries is the convergence of rate-cut expectations—and even a warming up of rate-hike expectations. CME futures pricing for 2026 indicates that the expected rate-cut size converged by nearly 70bp, and the 2-year yield surged by 50bp significantly. But the changes in the 10-year and 30-year yields are smaller.

This implies that the recent volatility in U.S. Treasuries is driven more by rate-cut expectations. In particular, the additional disruptions in the long end are limited. Once the situation eases, oil prices fall back, and rate-cut expectations recover, yields could fully recoup their losses.

(2) Valuation impact: This round’s rise in the term premium is limited, far below last year; the magnitude of long-term effects brought by geopolitical conflicts may be smaller than last year as well

If last year’s large selloff was not caused by fundamentals, what was the reason? The market generally tells a story about U.S. Treasury credibility and declining demand. This is reflected well in the behavior of the term premium. After “tariff liberation day,” the 10Y U.S. Treasury term premium rose by around 60bp, and then remained at a high level for a year. This means that in the pricing of U.S. Treasuries, valuations were systematically compressed.

After this round of shock, there has not yet been a sharp spike in the term premium, which provides better conditions for a rebound in U.S. Treasuries afterward.

(3) Liquidity: The deterioration on the demand side is also less severe than last year

After last year’s “tariff liberation day,” the spread between 10–30-year U.S. Treasuries and OIS swaps dropped sharply, indicating a significant deterioration in market demand for these older issues. There indeed was selling.

This year, there has also been a decline in liquidity, but it is relatively controllable, and signs of stabilization have emerged over the past two weeks.

(4) Inflation expectations: This round is severely divergent from oil prices. It may point to the market being more concerned about recession risk over the medium term, rather than inflation pressure—this is favorable for U.S. Treasuries

Another interesting phenomenon is that after last year’s tariff shock, oil prices fell sharply and inflation expectations declined. But this year, after oil prices have surged, the swap market still shows medium- to long-term inflation expectations staying stable, and even declining against the trend. This may mean that under the current geopolitical and oil-price shocks, near-term inflation faces upward pressure, but the market has major disagreement about the medium-term trajectory—some even lean toward inflation potentially falling, with the underlying driver being rising recession risk.

Historically, during oil-price up-cycle periods, U.S. Treasury yields also follow a pattern of rising first and then falling. Early on, they reflect short-term inflation pressure; later, they transition into recession narratives.

Therefore, if conditions continue to worsen and oil prices keep surging, with growth concerns taking the lead, it is not ruled out that U.S. Treasury yields could top out and then pull back.

Conclusion: Putting together factors such as the curve, rate-cut expectations, term premium, liquidity, and inflation expectations, we believe:

First, the core logic behind the decline this round is fundamentally different from the tariff episode last year. The former is about valuation and credibility; the current situation is based more on traditional fundamentals.

Second, the yield volatility this round looks more cyclical (once fundamentals disruptions end, it is prone to fall back), rather than structural (entering a higher range and having long-term effects);

Third, regardless of whether subsequent conflicts worsen (recession pricing) or improve (oil prices pull back), further downside in yields is worth expecting.

U.S. inflation rises beyond expectations, U.S. economic growth rises beyond expectations, causing the Federal Reserve to keep tightening monetary policy. The U.S. dollar appreciates sharply. U.S. Treasury rates rise. U.S. stocks keep falling. A crisis of bank failures erupts in commercial banks, and currency and debt crises appear in emerging markets. U.S. economic recession falls short of expectations (i.e., recession exceeds expectations), leading to a liquidity crisis in financial markets, forcing the Fed to pivot toward easing. Europe’s energy crisis exceeds expectations; the Eurozone economy falls into a deep recession. Global markets fall into turmoil, external demand shrinks, and policymakers face a dilemma. Global geopolitical risks intensify; China-U.S. relations deteriorate beyond expectations. There are uncontrollable factors in commodities and transportation. De-globalization deepens further. Supply chains continue to be disrupted, and competition for related resources worsens.

Security research report title: 《U.S. Treasury Declines Compared: U.S.-Iran vs. Last Year’s Tariffs—Weekly Perspective on U.S. Treasuries (15)》

External release date: March 29, 2026

Report issuing organization: CITIC Securities Co., Ltd.

Report analysts:

Qian Wei SAC No.: S1440521110002

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Responsible editor: Song Yafang