Iran war volatility strains trading in world's biggest markets

• Bid-ask spreads on two-year U.S. Treasuries widened roughly 27% in March compared to February, with liquidity in European interest rate futures falling to just 10% of normal levels at one point
• Hedge funds, which now comprise over 50% of trading volumes in UK and euro zone government bond markets, amplified the selloff by unwinding similar losing positions simultaneously
• Market makers are charging higher premiums or refusing to transact altogether, with traders reporting difficulty executing trades and being forced to break orders into smaller sizes

Summary

Market Crisis Overview:

The ongoing war in Iran has triggered severe disruptions across global financial markets, with traders and market makers reluctant to assume risk amid extreme volatility. Major markets affected include U.S. Treasuries, gold, currencies, stocks, bonds, and oil, with chaos persisting throughout March 2026.

Key Market Impact:

• Bid-ask spreads on two-year U.S. Treasuries widened approximately 27% in March versus February, indicating dealers are charging higher premiums for risk
• European short-term interest rate futures saw liquidity collapse to just 10% of normal levels
• Gold prices plunged after a record 2025 rally
• Trading volumes surged but primarily reflected forced unwinding of positions rather than voluntary activity

Hedge Fund Dynamics:

Hedge funds, which now represent over 50% of trading volumes in UK and eurozone government bond markets, exacerbated the selloff by simultaneously unwinding similar positions. Major losses occurred on bets for Bank of England rate cuts, European yield curve steepening trades, and Italian-German bond spread positions.

Trading Conditions:

Market makers are demanding smaller trade sizes and longer execution times. Some asset classes, particularly gold, experienced days with no market maker presence. While trading remains orderly, buyers are increasingly scarce as investors rush to de-risk and move to cash.

Regulatory Concern:

Three European financial regulators warned Friday about geopolitical tensions driving higher energy prices, inflationary pressures, and weaker economic growth. The situation recalls previous crises including COVID-19 (2020) and Trump's "Liberation Day" tariffs (April 2025), though current conditions suggest deeper corrections may materialize if the conflict continues.