The bid for Treasuries that swept through markets ahead of the weekend is unwinding amid hopes the conflict between Iran and Israel will now calm, with attention returning to the inflationary forces dogging the world economy.

The yield on 10-year securities rose as much as six basis points to 4.58% on Monday, more than halving Friday’s drop and edging back toward a five-month high touched last week.

The move reflects relief that Israel has so far chosen not to retaliate against Iran’s unprecedented attack, but also underscores the fear that instability in the Middle East will drive oil prices higher and heighten renewed worries about sticky inflation.

That could push back the expected start date for the Federal Reserve’s first rate cut even further. A string of hot US consumer price readings has already forced traders to reprice their expectations, and they are now betting the Fed will wait at least until July to start easing.

“While the immediate market response was seeking refuge in safe havens such as government bonds, there are looming concerns about another wave of inflation,” said Althea Spinozzi, head of fixed income strategy at Saxo Bank. “The possibility of a medium-term increase in yields cannot be discounted.”

Many bond investors have already been caught wrong-footed this year over inflation, and the resilience of the US economy more generally. The hawkish repricing pushed the yield on 10-year Treasuries up almost a full percentage point since the end of December, bruising investors who had piled into the securities on the view that monetary easing was imminent.

For now, the moves in the oil market have been relatively muted. Brent crude briefly jumped to $91 a barrel Monday before retreating back below the $90 mark. But that’s still close to a high for this year and well off a low of $72 back in December.

“The effects of higher oil prices will be felt globally, and this is coming at a time when there’s already concern about sticky inflation in several countries,” Deutsche Bank AG strategists including Henry Allen and Jim Reid wrote in a note.

As the market waits for clues on whether and how Israel will respond, attention turns back to economic fundamentals and guidance from Fed officials. US retail sales data due later Monday will be closely monitored for any signs that consumers are feeling the pinch from higher prices. There is also a slew of Fed speakers coming up, including chair Jerome Powell on Tuesday.

“The market is trying to get back to normal with a bit of relief rally,” said Tim Graf, head of EMEA macro strategy at State Street, referring to the more buoyant appetite for risk assets. “What all this bad news on inflation does is take Fed rate cuts off the table, though it doesn’t necessarily bring hikes back.”

Yet, some analysts point that Treasuries are the ultimate safe haven and demand will always be strong in times of geopolitical uncertainty.

“Oil spikes are often seen as transitory,” said Imre Speizer, a strategist at Westpac in Auckland. “Treasuries are still the only bond market big enough to absorb large scale safe-haven flows.”

Some strategists also see gold as a prime candidate, with the precious metal advancing to near its record high on Monday, Goldman Sachs Group Inc. predicts it is experiencing an “unshakable bull market.” For others, the dollar will retain its haven status.

“The dollar will be the beneficiary should tensions further escalate, even more so than the yen,” said Carol Kong, a strategist at the Commonwealth Bank of Australia Ltd. in Sydney. 

This article was provided by Bloomberg News.