The Treasury Market’s Iran Problem
Different measures of Treasury-yield volatility have diverged since the start of the Iran war — a pattern that may foreshadow a sudden dislocation in the Treasury market. Implied volatility in Treasury yields has steadily risen, while realized volatility has lagged, and yield dispersion — a measure of price consistency across the curve — has remained flat. Historically, these three measures move in lockstep during periods of macro stress, as they did during both the "Liberation Day" shock in April 2025 and the COVID-19 crisis of 2020.
Options markets are pricing in mounting risk, but that has yet to materialize in actual rate moves. And the flatness of yield dispersion suggests that curve pricing remains relatively orderly, even as headline volatility climbs. That combination is unusual — and it has rarely persisted for long. Meanwhile, we are seeing reduced market depth,1 and the Treasury basis trades that were widely feared as a source of instability during the April 2025 dislocation are larger than ever.2 The ingredients are in place for a repeat of April 2025.
The Treasury-market dislocation in the aftermath of the "Liberation Day" tariffs was swiftly calmed by a 90-day pause in tariffs, but a dislocation driven by an ongoing military conflict may not have such a simple remedy.3
Historical yield volatility is the 21-day exponentially weighted moving average yield change. Yield dispersion is the median absolute value of the curve-implied option-adjusted spread (OAS) and the market OAS. The spike in yield dispersion on Nov. 12, 2025, coincided with the end of the government shutdown and changing short-term rate expectations. Source: ICE, MSCI
The author thanks Daniel Aguirre for his contributions to this post.
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1 Kate Duguid and Ian Smith, “US bond market shows signs of strain as Iran war sparks Treasury tumult,” Financial Times, March 26, 2026.
2 Alex Harris, “Basis Trade Has Ballooned to $1.5 Trillion, Morgan Stanley Says,” Bloomberg, Jan. 13, 2026.
3 Greg Ip, “The Dollar and the Bond Market’s Ominous Message for Trump,” Wall Street Journal, April 10, 2025.
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