Iran-US Conflict Sends Investors Rushing for Inflation Protection

Investors are buying up interest rate derivatives to shield themselves from the threat of higher inflation and tighter monetary policy, bankers say.

This comes after a recent escalation in military strikes between the US and Iran, which has sent oil prices soaring. According to DTCC data collated by ISDA, around $44 trillion of interest rate derivatives notional changed hands in the month up to July 24, a 20% increase from the same period last year.

The renewed conflict has pushed Brent crude prices above $100 a barrel for the first time in two months, with oil flows through the region averaging just 46% of pre-war levels. This has sparked concerns that higher inflation will force central banks to raise interest rates.

Government borrowing costs have risen as bond investors react to the prospect of higher inflation, with the 10-year Treasury yield increasing to 4.70%. The Federal Reserve's decision to keep interest rates unchanged has done little to steady investor nerves, and some analysts believe yields can move even higher if oil prices remain above $100 a barrel.

Central banks are facing pressure to raise interest rates in response to the threat of inflation, but investors are still uncertain about their intentions. Societe Generale's Jorge Garayo said that open interest data across euro, US and UK short-dated futures markets point to a meaningful buildup in hedging activity into summer and through July.