U.S. endures weakest Treasury auctions in over 3 years as anxiety over Iran war grows

By Joy Wiltermuth

'You can't be too far out, and you can't be too far in,' says portfolio manager about taking risks during the Iran conflict

March was the worst month for weak Treasury auctions since October 2022, according to BofA Global.

The Iran conflict has investors second-guessing one of the world's crucial safe-haven assets.

A series of poor auctions in the $30 trillion Treasury market this week provide a glimpse into the growing anxiety in markets as the fighting in the Middle East enters a fifth weekend.

"I'm not really that surprised," said Robert Pavlik, senior portfolio manager at Dakota Wealth Management, of weak demand at recent auctions. "The last thing people are racing to do is to jump into any kind of fixed income - much less Treasurys - because the risk of inflation is ramping up."

A worry is that the Federal Reserve might need to raise interest rates to tame inflation. The central bank recently left one more cut to rates penciled in for 2026.

The selloff in bonds had the 10-year yield BX:TMUBMUSD10Y at 4.4% Friday, up from a brief dip below 4% in early March. The 2-year yield BX:TMUBMUSD02Y was at 3.9% after surging about 60 basis points over the same stretch, according to FactSet. Bond prices move in the opposite direction of yields.

Investors have been hesitant to step in front of the March selloff, wrote BofA Global's rates strategy team, led by Mark Cabana, in a Friday client note. As evidence, the Treasury market just logged its worst share of tepid auctions in a month in nearly three-and-a-half years.

Oil prices (CL00) (BRN00) have surged more than 40% since the U.S. and Israel attacked Iran on Feb. 28. That's kept global crude prices above $100 a barrel, with the risk of them reaching $200 still a concern.

Iran's gatekeeping of oil-tanker traffic through the crucial Strait of Hormuz has produced a historic energy shock around the globe. That's increased prices at U.S. gas pumps and raised alarm about food prices and agricultural shortages that could be part of the fallout.

"Investors are shortening up, staying safe and waiting for clarity," said Matt Wrzesniewsky, head of fixed-income client-portfolio management at Vanguard. Investors naturally ask for a bit of extra yield in jittery markets, he noted, especially when facing the uncertainty of geopolitical conflict. "That's a prudent response, not a panic."

The Treasury-market weakness comes as the U.S. needs $1 out of every $5 it receives in tax revenue to service the national debt, according to Apollo Global Management Chief Economist Torsten Slok. The U.S. also has $10 trillion of debt that needs refinancing over the next 12 months, Slok said in client notes this week.

Middle East hostilities have increased consumer pessimism about the economy, according to data released Friday. Credit conditions on Wall Street also have tightened, as have borrowing costs.

"With different concerns popping up day by day, investors are playing whack-a-mole and seeking appropriate compensation for risk," Vanguard's Wrzesniewsky said, noting the jump in bond yields since the conflict started.

"We don't know how long this lasts, and the longer it goes, the more markets have to price in things like higher deficits and pressure on consumer sentiment," he added.

Wrzesniewsky said he thinks fixed income still looks attractive, with 10-year Treasury yields resetting higher and corporate bonds offering income levels that haven't been seen in some time.

Pavlik at Dakota put it differently: "You can't be too far out, and you can't be too far in."

Stocks "turned on a dime" Monday, Pavlik noted, after President Trump announced a five-day cease-fire relating to attacks on Iran's energy infrastructure. Yet the new 10-day extension of that deadline to April 6 failed to rally markets Friday. "It's very difficult," he said.

-Joy Wiltermuth

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03-27-26 1433ET