Israel-Hamas conflict may spark off safe-havens; yields, dollar could harden: Analysts

On October 9, the safe-haven dollar advanced 0.2 percent versus euro and pound, while risk currencies such as Aussie and kiwi weakened

The outbreak of military conflict in the Middle East may add to the woes of global financial markets, which is already ailing from elevated interest rates. At a time of a decadal high US treasury yields and a firm dollar, analysts foresee violence in Israel to spark off volatility across global equity and bond markets as investors flock to safe-havens. Ritesh Jain, co-founder at Pinetree Macro, warned that the Israel-Hamas conflict could bring geopolitics premium to oil and spur volatility across bond and equity markets.

On October 6, the 10-year US Treasury yields touched an intraday peak of 4.8 percent, highest seen since August 2007. The 30-year long bond, too, breached the 5 percent-mark for the first time since August 2007.

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This risk-off sentiment was seen across European peripheral bonds as well, noted Jain of Pinetree on a LinkedIn post. Italian 10-year yields were above 5 percent last week for the first time since 2012, whereas Spanish 10-year yields were above 4 percent for the first time since 2013.

Separately, Japanese 10-year yields jumped above 80 bps last week, a feat seen for the last time in a decade.

As geopolitical uncertainty following Hamas surprise attack on Israel intensifies, the flight to safety in government securities and dollars could be on the rise.

On October 9, the safe-haven dollar advanced 0.2 percent versus euro and pound, while risk currencies such as Aussie and kiwi weakened.

READ MORE: A brief history of Israel-Palestine conflict

The instability in Middle East, analysts believe, could add legs to dollar’s recent upsurge.

“If the dollar currency remains strong, bond yields are likely to remain elevated,” said KR Choksey, managing director of KR Choksey Shares and Securities.

Manoranjan Sharma, chief economist at Infomerics Ratings, too, expects bond yields to harden if the situation worsens. “The surprise Israel-Palestine war would have wide-ranging ramifications and repercussions across geographies, economies, and sectors. There will be volatility in the bond and equity market temporarily. Bond yields will harden, cost of credit may go up for companies, crude price will rise if it spills over to Middle East,” he added.

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Back home, the 10-year government bond yield climbed 20 bps to 7.3 percent on October 9.

Israel-Palestine conflict

On October 7, over 2,000 rockets were fired towards southern and central Israel by the Hamas militants, as per the Israel Defence Forces. The armed Hamas militants then stormed blockaded areas of the Gaza strip, shooting people to which Israel retaliated by launching jet fighters later.

While the White House condemned the attack on Israel, saying that it ‘will remain in close contact with Israel partners’, the republicans blasted President Joe Biden for unfreezing $6 billion worth of Iranian assets months before Hamas militants launched a deadly attack on Israel.

The US Secretary of State Antony Blinken, however, pushed back these claims, noting that none of the money has been spent yet and it can be used only for humanitarian purposes.

READ MORE: US President says he stands with Israel, pledges support; other top developments on Hamas attack on Israel

Commenting on these developments, Jain of Pinetree Macro said that the $6 billion asset unfreeze makes US look bad ahead of their presidential election cycle.

“Over the last few months, US has turned a blind eye to increasing Iran exports. Given the current situation, Washington will not only be under pressure to cut this source of money for Iran but increasingly arm Israel. Since US is already running short on arms and ammunitions due to their commitment in Ukraine, they will now be more over extended,” added Ritesh Jain.

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