The Iran war has caused chaos in financial markets, making some investors and market makers more hesitant to take risks, making trading more difficult and expensive, in a scenario closely monitored by regulators.
Investors and traders reported that the repercussions affected major global markets, from US Treasury bonds and gold to currencies. In Europe, hedge funds, which currently dominate bond trading, reinforced these movements by quickly liquidating a number of their positions during the current month.
Investors say they have had difficulty obtaining prices or executing deals over the past four weeks, due to market makers’ fear of participating in large positions that may quickly turn unprofitable, according to Reuters.
“When we try to trade, it takes longer. Market makers want us to be more patient and divide trades into smaller sizes,” said Rajeev de Mello, chief investment officer at Gamma Asset Management, adding that the gaps have widened between the buy price that market makers target for the asset and its target selling price, explaining: “As a result, everyone has reduced their position sizes.”
Various volatility indices rose to levels similar to those seen in previous market crises, including stock, bond, oil and gold indices. Even government bond markets, traditionally characterized by strong trading and abundant liquidity, which is considered a cornerstone of global finance, have been severely affected by investors’ fears of inflation risks.
The latest symptoms of pressure on the markets
Morgan Stanley notes that the spread between bid and ask prices on new two-year US Treasury bonds, a key indicator of market soundness and the cost of transactions for the most widely traded securities, rose by about 27% in March compared to February levels, indicating that dealers are demanding a higher premium to bear risk.
To be sure, recent symptoms of market stress have previously appeared during periods of turmoil, such as during US President Donald Trump’s “Emancipation Day” tariffs last April and the Covid-19 pandemic in 2020. However, this wave of volatility comes at a time of market expansion, with investors taking advantage of a significant rally across all asset classes, suggesting the potential for a larger correction if the war lasts longer and liquidity disappears.
Negative consequences
In Europe, the negative consequences were most evident in the short-term interest rate futures market, where traders quickly weighed the impact of implementing large interest rate increases by central banks.
Daniel Aksan, co-head of interest rates in Europe, the Middle East and Africa at Morgan Stanley, said that liquidity “declined sharply” at one point, reaching only 10% of usual levels, adding that the situation of lack of liquidity and price movements “reminded me of the days of Covid.”
Three European financial regulators said that ongoing geopolitical tension, especially the war in the Middle East, poses serious risks to the global financial landscape through rising energy prices, potential inflationary pressures and weak economic growth, and they reiterated their warning about the impact of volatility on liquidity and the risks of sudden price swings.
Trading remains normal so far, but the lack of buyers has increased at a time when investors are rushing to reduce risks and switch to cash, which in turn leads traders to hesitate in making decisions.
Liquidity crisis with the absence of dealers
“Companies lost a lot of money, whether on the sell side or the buy side, to the point of reaching a liquidity crisis with the absence of dealers,” said Tom Di Galloma, managing director of the global interest rates trading department at the financial brokerage firm “Mishler Financial,” referring to the US Treasury bond market.
Despite increased trading volumes in Treasuries, analysts say some of these trades were done out of necessity rather than choice. Eli Carter, US interest rate analyst at Morgan Stanley, said: “As the spread between the offered price and the asking price widens, it becomes more expensive to execute a deal and less attractive to enter into deals, but the fact that you are still seeing very high volumes indicates that some of these deals constituted exits from positions or forced liquidations.”
The massive sell-off in European bonds in particular was an example of the impact that hedge funds can have on this market in times of stress, a risk specifically noted by the Bank of England as their influence has grown rapidly in the past few years. The latest TradeWeb data for 2025 showed that hedge funds now represent more than 50% of trading volumes in government bond markets in Britain and the eurozone.
The funds suffered huge losses
Their presence in bond markets provides liquidity in good times, but many piled into the same trades, some of which quickly proved to be losers. Three investment sources in the field of hedge funds reported that these funds incurred huge losses due to their bet on the Bank of England lowering interest rates.
Bruno Benchimol, head of the European government bond trading sector at Credit Agricole, said that hedge funds also incurred losses in deals that bet on the steepening of European yield curves, and in deals that assumed that the gap between Italian and German bond yields would remain narrow. He added that all of them liquidating the same positions at the same time prompted bond traders to widen the difference between the offered price and the requested price. Morgan Stanley’s Aksan said that hedge funds simultaneously reducing risk “increases volatility.”
Pressure to win business
But market makers still face pressure to win business even as clients reduce the frequency and size of trades. Sagar Sambrani, a senior currency options trader at Nomura Bank, said that prices for large orders increased compared to normal market conditions to take into account market risks, but he added: “Contrary to expectations, prices for small orders have become lower than usual, as market makers strive to take advantage of lower customer flows.”
But sometimes this is not possible. In the gold market, which is strongly affected by interest rates, Mukesh Dave, chief investment officer at Aravalli Asset Management, said that there are days when market makers are completely absent, which indicates a reluctance to conduct transactions. The price of gold, typically a safe-haven asset, fell this month after a record high in 2025. “They don’t want to make money right now, and they don’t want to lose money by being in the market,” Dave said. “If they have the opportunity, they don’t want to be in the market.”
