The Return of The Forever War

Tresmark: The term ‘Forever Wars’ emerged from the US’ seemingly endless conflicts. They have destroyed presidencies before.

In 1979, Iran held 52 Americans hostage for 444 days. Every evening, American television counted another day of humiliation. Carter’s presidency slowly became inseparable from the crisis. The hostages were finally released on January 20, 1981, minutes after Ronald Reagan took office and after politically crushing Carter.

What if Iran doesn’t need to win the war? What if it simply needs to make sure the US cannot finish it?

Iran understands something that military balance sheets don’t capture. It cannot outgun the US. It cannot outspend the US. But it can potentially outwait a US presidency.

The Bond Market Has a Problem

Forever Wars cost the US trillions of Dollars. What happens when the next one arrives with 5% Treasury yields?

The timing could hardly be worse. US government debt crossed $40 trillion this week. The 30-year Treasury yield briefly touched 5.34%, its highest level since 2007, while the 10-year approached 4.75%.

The pressure became uncomfortable enough that the US Treasury doubled the size of its planned buybacks of long-dated bonds.

Bonds rallied, but just for about a day. By Friday, yields were climbing again.

There are several reasons behind the selloff. Deficits are enormous, inflation remains stubborn and even the AI boom is adding pressure as technology companies issue billions in debt to finance data centres and infrastructure. Investors suddenly have plenty of places competing for their money.

From Hormuz to Main Street

Now add another Forever War. And this is where Iran’s battlefield moves from the Persian Gulf to Main Street America.

The chain is simple:
Hormuz → Oil → Inflation → Treasury yields → Consumer confidence → Elections.

But something even more interesting is happening underneath.

The Fade of Exceptionalism?
For decades, whenever the world got into trouble, money ran toward the US. Wars strengthened the Dollar. Crises pushed investors into Treasuries. The US could run enormous deficits, fight expensive wars and still borrow cheaply because the world considered its assets the ultimate safe haven.

That was US exceptionalism at work. But today the markets are signalling something different:
• Oil is rising.
• Treasury yields are rising.
• The Dollar is weakening.
• Gold is rising.

Perhaps these are simply different markets reacting to different things. Or perhaps the world’s greatest financial privilege is becoming much more expensive.

For decades, Washington could discipline much of the world through the Dollar. Now the bond market is beginning to discipline Washington. The fade of US Exceptionalism is a real risk at the moment.

And this is where the story becomes relevant for Pakistan
Pakistan may have done enough domestically to earn lower interest rates, but the world may not allow it. Pakistan remains an oil-importing economy, and another prolonged energy shock changes the equation.

More importantly, with global yields rising and oil remaining elevated, Pakistan will surely not be looking to cut rates.

Unless oil prices retreat meaningfully or the geopolitical picture improves, we see very little reason for the SBP to cut rates at its September meeting.

Exporter Forward Bookings

While forward booking volumes have come down sharply, exporters should continue looking to lock in attractive premiums. The market’s favoured tenors currently appear to be around 4 to 6 months.

Where Do Markets Go From Here?

A weaker Dollar remains our broader view, although rising US yields will make the journey volatile. We remain bullish on EUR/USD and USD/JPY, and bearish on GBP/USD. We also remain constructive on Gold.

Gold Targets

Gold has already done much of what we expected. Our weekly and quarterly targets have now largely been achieved, so chasing the move from here becomes less attractive. The longer-term structural story remains intact, but after such a strong move, profit-taking around $4,700 appears the safer trade.

Oil

Oil is different. As long as Hormuz remains disrupted, the risk premium remains difficult to remove. The upside can become uncomfortable very quickly if the conflict deteriorates further.