Investors reacted to the third day of the Iran conflict by dumping U.S. government bonds as oil prices spiked and Middle East hostilities stoked fears of an inflation resurgence.

Rapidly rising bond yields tend to unleash havoc on Wall Street. They can derail the stock market SPX, send a chill through capital markets and raise borrowing costs for households and businesses.

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The 10-year Treasury yield BX:TMUBMUSD10Y surged 9 basis points to 4.051% on Monday, its biggest daily increase since June 6, according to Dow Jones Market Data. Bond yields move in the opposite direction to prices.

“Wars are inflationary because you are burning money,” said Harley Bassman, managing director at Simplify Asset Management. “You buy a missile, it blows up and it is gone.” That said, what matters now is how long the conflict will last, he said.

President Donald Trump said Monday that the Iran operation could last four to five weeks — or longer — but also that he was willing to talk with emerging leaders in Iran after U.S.-Israeli military strikes over the weekend killed the nation’s leader, Ayatollah Ali Khamenei. “Somebody said today, they said, ‘Oh, well, the president wants to do it really quickly. After that, he’ll get bored.’ I don’t get bored. There’s nothing boring about this,” Trump said in a White House briefing.

Also read: Trump leaves door open for extended U.S. campaign against Iran

The Treasury selloff comes on the heels of a surprising rally for U.S. government bonds that coincided with a violent rotation under the surface of the stock market as investors looked for places to hide from selling in technology and software stocks.

Signs that the U.S. economy might be reaccelerating also have cropped up, helping small-cap stocks RUT overperform their large-cap peers in 2026, as well as other economically sensitive parts of the equity market.

Yet the risk of artificial intelligence overtaking the software industry, making other business lines obsolete and triggering painful white-collar job losses, also have been concerns.

That had Treasurys briefly looking like a port in the storm, with the benchmark 10-year rate dipping below the psychologically important 4% threshold last week. Because the rate serves as a peg for home loans, it helped pull the 30-year mortgage rate below 6% for the first time since 2022.

Bigger picture, bond-market jitters had appeared on the radar even before the weekend attack on Iran. The closely watched ICE BofA MOVE Index, which tracks investor anxiety over interest-rate moves based on a 30-day horizon, had spiked to 73.38, its highest level of the year.

Simplify’s Bassman, who created the MOVE index, said its 30-day horizon means economic data releases, such as inflation reports or labor-market data, can lead to big daily spikes. Last week’s producer-price index for January surprised Wall Street by showing that the cost of wholesale goods and services saw their biggest increase in four months.

Concerns of an oil-supply glut had been keeping oil prices and U.S. inflation in check — at least until investors started factoring in a potential conflict with Iran.

On Monday, global Brent BRN00 and domestic West Texas Intermediate CL00 crude touched their highest levels since June.

See: Here is the ‘worst-case scenario’ for oil and the Strait of Hormuz

“In the near term, there are some inflationary impulses from the rise in oil prices over the last couple of months,” Angelo Kourkafas, senior global investment strategist at Edward Jones, said in an interview Monday.

Geopolitical uncertainty and oil-driven rises in inflation could be viewed as more transitory by the Federal Reserve, Kourkafas said. However, those factors also might make the idea of interest-rate cuts more challenging over the immediate term, because “the optics might not be good.”

The Dow Jones Industrial Average DJIA closed modestly lower, the S&P 500 index ended flat and the Nasdaq Composite Index COMP gained 0.4% after a lower start to Monday’s session.

Battered software shares rose IGV, as did several of the “Magnificent Seven” stocks MAGS and shares of high-yield bond exchange-traded funds JNK HYG were virtually unchanged.

George Catrambone, head of fixed income for the Americas at DWS, said the quick turnaround in risk assets on Monday suggests investors were focused on buying the dip and optimistic that the conflict could be resolved in the next few weeks.

“I’m a little surprised,” Catrambone said, noting the risks of Arab Gulf states being swept up in the conflict, that the crucial Strait of Hormuz could remain off limits to oil-tanker traffic for a protracted period and “other outcomes that could be different.”

See: Iran conflict hits a market that’s more overvalued than during the 1973 oil shock

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