Sameer and Vishal meet over a coffee and they are discussing bonds. The US-Iran conflict has drawn attention to equities, oil, gold and commodities, but the two friends explore the developments in bond yields under the radar.

Sameer: The US Fed meeting ended on Wednesday without cutting the rates. This must have moved bond yields higher.

Vishal: Yes, the expectation remains of a single rate cut this year. But looking at the bond yields, the markets may have priced in no rate cut this year on fear of higher inflation. The US 2-year bond yields have moved up by 23 basis points in the last three days and the 10-year yields have moved up by 18 basis points.

Sameer: In retrospect the expectation seems questionable as inflation concerns are showing up everywhere. This follows a tariff impact which affected inflation in the US earlier. But, the difference between short term and long-term yield reaction is interesting. The former has reacted sharply compared to the latter.

Vishal: Yes, the short-term ones moved higher than the long-term yields. This is bear flattening playing out since the time the conflict began in February-end and is only a continuation from there.

Sameer: Can you please explain bear flattening.

Vishal: Sure. Bear flattening is a situation wherein the short-term yields rise faster than the long-term yields. The yield curve in normal situations is steep, with short-term yields lower than long-term yields, to account for higher risk of holding in longer dated bonds. But since beginning of the year and accentuated since the conflict began, short-term yields have risen by 43 bps (2-year) compared to 18 bps (10-year) rise in long-term yields, as shown in the chart.

The yield movement can be inferred as inflation impact in the short-term outweighing other concerns due to the conflict. Even as long-term yields factor for inflation, general economic growth concerns are driving relatively better long-term bond demand and offsetting inflation impact. But, some concerns that the US Fed’s next move whenever it comes could be rate hike to deal with inflation impact from the war is now getting discussed. This is driving a slower rise in 10-year bond yields compared to a greater spike in 2-year yields. The 2-year yields more closely reflect expectations on central bank’s rate path.

Sameer: So, the bear in bear flattening refers to the bear market in equities?

Vishal: Ha ha! While bear flattening refers only to the yield curve, this time it is bearish for equities too. High inflation and lower growth are being priced into bonds. This can also be summed up as stagflation. The ripple that began with energy prices is being projected into AI investments, housing affordability, lower earnings growth and higher commodities.

Sameer: The solution to all of this lies in the Strait of Hormuz.

Vishal: Yes. If that is not resolved, bear flattening will start impacting equities as well.

Published on March 21, 2026