U.S. Treasury Yields Drop as Oil Plummets on Trump’s Iran Strait of Hormuz Warning

U.S. 10-year Treasury yields fell to 4.12% on Monday, marking a 12-basis-point decline from Friday’s close, as investors sought safe-haven assets amid escalating Middle East tensions. The move followed a 7.3% drop in West Texas Intermediate (WTI) crude futures, with CL=F settling at $68.40 per barrel—the lowest level since January 2026—after Trump stated that any attempt by Iran to block Strait of Hormuz traffic would trigger a 'much harsher' response than in previous confrontations. The sharp oil selloff was driven by fears of supply disruption, yet the market interpreted the warning as a signal of potential military escalation, prompting a flight to bonds. The CBOE Volatility Index (^VIX) spiked 14% to 18.7, reflecting increased investor anxiety over regional instability. Energy sector indices declined, with the S&P 500 Energy Sector Index falling 2.1%, while defense stocks rose modestly as investors priced in a higher probability of military action. The Strait of Hormuz, through which approximately 20% of global oil supply passes, has long been a flashpoint. Iran’s recent naval exercises near the strait and threats to restrict shipping activity intensified market concerns. However, the Treasury market’s response suggests that while supply fears initially pressured oil prices, the broader risk of conflict is now dominating investor sentiment. This shift underscores the growing sensitivity of financial markets to geopolitical rhetoric from high-profile political figures.