Apollo Economist: Iran War, Tariffs Drive US Yields Higher

Torsten Slok, the chief economist at Apollo Global Management, has stated that geopolitical factors, specifically the conflict in Iran and ongoing trade tariffs, are the primary drivers behind the upward pressure on US Treasury yields. Slok articulated this view in comments reported by Bloomberg, suggesting that concerns regarding the fiscal situation within the United States are less significant than external pressures. He contrasted the US policy environment with those of Japan and Germany, noting that "There are actually fewer worries about US policy making than there is in Japan and Germany." This perspective places the emphasis on international instability and trade disputes as key determinants of bond market performance, rather than domestic economic management or government spending.

The assertion by Slok challenges conventional analyses that often point to the substantial US national debt and ongoing fiscal deficits as major contributors to higher borrowing costs. The US national debt has surpassed $34 trillion, a figure that has grown significantly in recent years due to increased government spending and tax cuts. This accumulation of debt typically necessitates the issuance of more Treasury bonds to finance government operations, which can lead to increased supply and, consequently, lower prices and higher yields for these securities as investors demand greater compensation for holding the debt. However, Slok's analysis suggests that the market's reaction to US debt levels is currently being overshadowed by other, more immediate risks.

The ongoing conflict involving Iran and its implications for global oil supply and regional stability represent a significant source of uncertainty. Potential disruptions to oil production or shipping routes in the Middle East can lead to spikes in energy prices, which in turn can fuel inflation. Central banks, including the US Federal Reserve, often respond to rising inflation by increasing interest rates to cool down the economy, which directly impacts bond yields. Higher interest rates make new bonds more attractive, putting downward pressure on the prices of existing bonds with lower coupon rates. Similarly, trade tariffs, such as those imposed or threatened between the US and other major economies, can disrupt supply chains, increase business costs, and contribute to inflationary pressures, further complicating the economic outlook and influencing monetary policy decisions.

Slok's commentary highlights a nuanced view of the factors influencing bond markets, suggesting that investors are currently prioritizing geopolitical and trade-related risks over domestic fiscal concerns. This perspective implies that any resolution or escalation of the Iran conflict, as well as shifts in global trade policies, could have a more pronounced effect on US Treasury yields than debates surrounding the US budget deficit or national debt. The Federal Reserve has maintained its benchmark interest rate in the 5.25%-5.50% range since July 2023, with market participants closely watching economic data for signals on the timing and extent of potential rate cuts. However, persistent inflation or renewed geopolitical shocks could alter this trajectory, leading to a prolonged period of higher interest rates.