Nothing rhymes

Research on U.S. wars since Vietnam shows that military conflicts can influence interest rates, but the impact depends far more on the monetary and fiscal regime than on the war itself. Vietnam remains the clearest case where war spending helped push rates higher. Military expenditures surged while the U.S. simultaneously expanded domestic programs, and the Federal Reserve accommodated the resulting fiscal deficits. This combination contributed to rising inflation in the late 1960s and early 1970s, driving the 10-year Treasury yield from roughly 4% in the mid-1960s to around 8% by 1970, eventually feeding the bond bear market that culminated with Volcker-era yields above 15% in 1981.

Later conflicts produced very different outcomes. The 1990–1991 Gulf War had minimal impact on rates because it was short and partially financed by allied contributions, limiting the increase in U.S. deficits. The wars in Iraq and Afghanistan after 2001, despite costing trillions of dollars, also failed to push yields higher. Instead, Treasury rates declined through much of that period as broader global forces dominated the bond market—particularly the global savings glut, strong foreign demand for Treasuries, and aggressive Federal Reserve easing following the 2001 recession and the 2008 financial crisis.

The lesson for markets today is that war itself is not the primary driver of bond yields—the macro regime is. When conflict coincides with rising deficits, supply shocks (especially energy), and persistent inflation pressures, it can reinforce a higher-yield regime, much like the late-1960s experience. But if geopolitical shocks occur in a world of weak growth, strong demand for safe assets, or accommodative central banks, the opposite can happen.

The contrarian view is that conflict often pushes yields lower in the short run, not higher. In the early stages of most geopolitical shocks, global investors typically move into U.S. Treasuries as the world’s primary safe-haven asset. That flight-to-safety dynamic tends to produce falling long-term yields and a bull-flattening curve, as seen during events such as 9/11, the Iraq invasion, and the initial phase of the Russia-Ukraine war, when risk assets sold off and Treasuries rallied.

Dang that’s a lot to sort though innit

Thanks to ChatGPT and Claude for references and stuff

Conflict can also be disinflationary in the near term if it weakens global growth. Wars can disrupt trade, freeze investment, and tighten financial conditions, causing growth expectations to fall faster than inflation rises. This helps explain why Treasury yields declined through much of the Iraq and Afghanistan war period, despite massive fiscal spending.

For positioning, the clean contrarian trade is long duration if markets lean too heavily into a “war equals inflation” narrative. The thesis is that geopolitical escalation triggers a risk-off growth shock, pushing investors into Treasuries and forcing the Fed toward easier policy. In that scenario, the yield curve likely bull-flattens, making long-end bonds one of the most effective hedges against a geopolitical shock.