LONDON/NEW YORK/SINGAPORE – The Iran war has sent shockwaves across financial markets, leaving some investors and market makers reluctant to take risks, making trading more difficult – with regulators watching closely.
There is no major global market, from US Treasuries, to gold, to savings, investors and traders said. In Europe, hedge funds, which currently dominate bond trading, have added to that momentum as they quickly cut stakes this month.
Traders say they have sometimes struggled to find prices, or make trades in the past four weeks, as market makers fear sticking to large positions that could quickly turn unprofitable.
Rajeev De Mello, chief investment officer at GAMA Asset Management, said that gaps have widened between the price at which market makers buy an asset and the price at which they will sell it. “What has had the effect is that everyone has reduced the size of their positions.”
Various levels of volatility have risen to levels seen in previous market crises, including those in stocks, bonds, oil and gold.
Cracks have appeared even in the deep and liquid sovereign wealth markets, the bedrock of crisis-hit global currencies as inflation risks hurt investors.
The difference between bid and ask prices on two-year US Treasuries, a key measure of market depth and cost of sales for the most traded securities, has now widened 27% in March, compared to January levels, according to Morgan Stanley, suggesting traders are charging a higher premium for risk.
WARNING IN THE BOX
To be honest, recent signs of market pressure are not uncommon during periods of market turmoil, such as during US President Donald Trump’s “Independence Day” tariffs last April and the 2020 COVID pandemic.
But this level of uncertainty came at a time when markets were in a broad range, as investors marched across asset classes, suggesting that a deep correction could emerge if the war continues and money evaporates.
In Europe, the pain has been especially present in the futures market for short-term rates, where traders were quick to buy high central bank rates.
Liquidity was “significantly reduced” at one point, running at 10% of normal levels, Morgan Stanley’s head of EMEA ratings Daniel Aksan said.
“(The lawlessness, the price movement) reminds me of the days of COVID,” he said.
Three European financial managers on Friday said that the ongoing political tension, namely the conflict in the Middle East, poses major risks to the global financial situation with high energy prices, possible inflationary pressures and weak economic growth. They reiterated their warning about the impact of currency fluctuations and the risk of sudden price changes.
PROTECT YOUR GIFTS
Business has so far remained orderly, but buyers are becoming increasingly scarce as investors rush to take risks and cash in, leaving sellers on the sidelines.
“Firms have lost a lot of money – whether it’s the selling or the buying side – the money is being destroyed because you don’t have players,” said Tom di Galoma, managing director of global equity trading at Mischler Financial, referring to the US Treasury market.
Although the number of trades in Treasuries has increased, analysts say that some of these activities are done out of necessity, not by choice.
“With a broad supply of applications, it is more expensive to do business and it will not attract people to enter the business, but the fact that you are still seeing very high numbers suggests that some of these jobs were to be relaxed, or stopped,” said Morgan Stanley, US strategist Eli Carter. ATTACKS ULAHA
The particularly sharp selloff in European bonds has also been an example of the effect of hedge funds that can have on the market in times of stress, a risk that the Bank of England in particular has marked as their position increases rapidly in recent years.
Hedge funds now make up more than 50% of trading prices in the British and euro government bond markets, according to Tradeweb’s latest data from 2025.
Although their presence in the bond markets provides money in good times, many were concentrated in similar activities, some of which became apparent quickly.
Hedge funds have taken heavy losses on bets that the BoE will cut rates, three hedge fund investment sources said. They also ignored trade bets on high European yields and trade that assumed the spread between Italian and German bonds would remain narrow, said Credit Agricole’s head of European government bond trading Bruno Benchimol.
As they all lowered the benchmarks at the same time, that pushed bond dealers to widen the benchmark spreads, Benchimol added.
As hedge funds de-risk at the same time, it “exacerbates volatility,” said Morgan Stanley’s Aksan. At times, they took positions that helped reduce uncertainty, he said. Market Analysis
But market makers are still under pressure to win trades even as clients reduce the frequency and size of trades.
Sagar Sambrani, senior FX options trader at Nomura, said the prices of the bigger tickets increased in line with normal market conditions to account for market risk. But, “counter-intuitively, small-ticket prices are stronger than normal as marketers try hard to capture the diminishing flow of buyers,” Sambrani said.
But sometimes this is not possible.
In the gold market, which is sensitive to interest rates, Mukesh Dave, chief investment officer at Aravali Asset Management, a global arbitrage fund, said there were days when market makers were completely absent, showing a reluctance to act.
The price of the usually safe-haven gold fell this month after a record rally in 2025.
“They don’t want to make money at the time, they don’t want to lose money by being in the market. If they’re given a choice, they don’t want to be in the market,” Dave said.
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