Mark Zandi, chief economist at Moody's Analytics, stated on the 27th (local time) via his X account that the Iran war's economic impact now extends beyond energy prices to monetary policy and long-term interest rates. Zandi explained the war has driven US borrowing costs higher, with 10-year Treasury yields rising from below 4% before the conflict to near 4.7% currently, and 30-year fixed mortgage rates climbing from below 6% to above 6.8%. He warned that maintaining high interest rates for an extended period is becoming an increasingly difficult burden for the US economy to bear.
10-Year Treasury Yields Rise from Below 4% to Near 4.7%
Zandi highlighted that US 10-year Treasury yields have moved from below 4% before the Iran war to approaching 4.7% currently. This increase has directly affected household and corporate borrowing costs, with 30-year fixed-rate mortgages rising from below 6% to above 6.8%. The economist noted these higher costs represent a growing financial strain on economic participants.
Rate Increase Not Driven by Inflation Expectations
Zandi clarified that the recent rise in long-term interest rates did not stem from increased inflation expectations. He stated, "What's somewhat surprising is that interest rates have not risen due to inflation expectations. Inflation expectations have not changed." This analysis distinguishes the current rate environment from inflation-driven scenarios.
Fed Tightening Expectations and Term Premium Drive Half of Rate Rise Each
The economist attributed the 10-year yield increase to two equal factors: Federal Reserve tightening expectations and term premium expansion. Zandi explained that approximately half of the rate rise reflects investor conviction that the Fed will raise rates to control unwanted inflation, representing an increase in expected real short-term rates. He described the other half as resulting from term premium expansion — the additional risk compensation investors demand for holding long-term bonds versus short-term securities. Zandi cited Fed Chair Kevin Warsh's reduced market communication as one factor contributing to higher term premiums, stating, "It doesn't help that the Fed Chair believes the Fed should reduce transparency in the monetary policy decision-making process. This increases policy uncertainty and ultimately expands interest rate volatility." He also noted the Iran war is imposing growing cost burdens on the US Treasury, with America's fiscal outlook darkening further.
FAQ
What did Mark Zandi say about the Iran war's impact on US interest rates on the 27th?
Mark Zandi stated via X on the 27th (local time) that the Iran war's economic impact now extends beyond energy prices to monetary policy and long-term interest rates, with 10-year Treasury yields rising from below 4% to near 4.7% and 30-year mortgage rates climbing from below 6% to above 6.8%.
Why did US long-term interest rates rise according to Zandi's analysis?
Zandi explained that approximately half of the 10-year yield increase resulted from investor expectations that the Federal Reserve will tighten policy to control inflation, while the other half came from term premium expansion — the additional risk compensation investors demand for long-term bonds, influenced partly by reduced Fed communication transparency under Chair Kevin Warsh.
