The Iran war triggered a global liquidity crisis, with market makers in US Treasury bonds and gold seemingly "lying flat."
2026-03-30 16:25:52
The ongoing conflict with Iran has caused significant disruption to global financial markets. Investors and market makers are becoming more risk-averse, impacting core markets from US Treasury bonds and gold to foreign exchange. Trading has become more difficult and costs have risen significantly, a phenomenon that is being closely monitored by regulatory agencies.
Geopolitical uncertainty caused by war and disruptions to energy supplies have combined to increase market volatility, making market makers reluctant to take on large positions and making it difficult to match buyers and sellers.
Gold prices have seen a significant pullback from their highs over the past month, representing a relatively sharp correction. On Monday (March 30th) during the European session, spot gold fluctuated upwards, currently trading at $4530 per ounce, a daily increase of approximately 0.8%. Although there has been a rebound from lower levels, it remains significantly below the levels seen at the beginning of the month, indicating a short-term period of high volatility and correction. Geopolitical factors, inflation expectations, and the dollar's performance remain the main influencing factors.
Over the past four weeks, investors have frequently struggled to obtain timely quotes or complete trades smoothly. Market makers are concerned that large positions they take on will quickly turn into unprofitable positions that are difficult to close, so they are asking traders to be more patient and tend to break large orders down into smaller ones.
Rajeev De Mello, Chief Investment Officer at GAMA Asset Management, stated that bid-ask spreads have widened significantly, leading to a general reduction in position sizes among market participants. This tightening of liquidity has further amplified price volatility, creating a vicious cycle.
Rising inflation risks have deterred investors, severely impacting the US Treasury market. According to Morgan Stanley data, the spread between new two-year Treasury bonds widened by approximately 27% in March compared to February, reflecting traders charging higher premiums to cover risk.
Tom di Galoma, Managing Director of Global Interest Rate Trading at brokerage firm Mischler Financial, pointed out that many institutions suffered losses in the US Treasury market, leading to reduced participation from both buyers and sellers, further impairing liquidity. Eli Carter, US Interest Rate Strategist at Morgan Stanley, emphasized that while trading volume remains high, a large portion of it consists of closing out positions or stop-loss orders.
In Europe, hedge funds' rapid sell-offs in the bond market have amplified volatility. The Bank of England is particularly concerned about this risk, as hedge funds have accounted for more than 50% of trading volume in the UK and Eurozone government bond markets in recent years.
Hedge funds suffered significant losses on trades betting on a Bank of England rate cut, a steepening yield curve, and a continued narrow spread between Italian and German government bonds. Daniel Aksan, co-head of Morgan Stanley's EMEA interest rate practice, said that liquidity in the short-term interest rate futures market shrank to as little as 10% of normal levels, reminiscent of the pandemic period.
Gold, a traditional safe-haven asset, has seen a significant pullback this month after a record surge in 2025. Mukesh Dave, chief investment officer of global arbitrage fund Aravali Asset Management, pointed out that market makers were completely absent on some trading days, indicating their unwillingness to take on any trading risk.
Dave's description reflects the prevailing risk aversion in the current market: "Right now, they don't want to make money or lose money; if they had a choice, they wouldn't want to be in the market at all."
Investors' eagerness to reduce risk and move to cash has led to a scarcity of buyers, further exacerbating market makers' hesitation. A sharp sell-off in European bonds, failed concentrated bets by hedge funds, and rising inflation expectations have created multiple pressures, collectively driving up transaction costs and reducing market depth.
Although trading has remained relatively stable so far, the liquidity crisis could worsen if the conflict escalates further or energy prices remain high.
The war with Iran has impacted global financial markets through both geopolitical risks and energy price fluctuations, leading to increased transaction costs and a significant decrease in liquidity. Core assets such as US Treasury bonds, European bonds, and gold have seen widening spreads and conservative market makers, while concentrated selling by hedge funds in this headwind environment has further amplified volatility. Regulators need to closely monitor this risk transmission, while market participants should be wary of the potential chain reactions triggered by insufficient liquidity. The duration of the war and the progress of peace talks will be key variables determining the speed of financial market recovery.
At 16:25 Beijing time, spot gold was trading at $4,532.14 per ounce.
Geopolitical uncertainty caused by war and disruptions to energy supplies have combined to increase market volatility, making market makers reluctant to take on large positions and making it difficult to match buyers and sellers.
Gold prices have seen a significant pullback from their highs over the past month, representing a relatively sharp correction. On Monday (March 30th) during the European session, spot gold fluctuated upwards, currently trading at $4530 per ounce, a daily increase of approximately 0.8%. Although there has been a rebound from lower levels, it remains significantly below the levels seen at the beginning of the month, indicating a short-term period of high volatility and correction. Geopolitical factors, inflation expectations, and the dollar's performance remain the main influencing factors.
Rising transaction costs and tightening liquidity
Over the past four weeks, investors have frequently struggled to obtain timely quotes or complete trades smoothly. Market makers are concerned that large positions they take on will quickly turn into unprofitable positions that are difficult to close, so they are asking traders to be more patient and tend to break large orders down into smaller ones.
Rajeev De Mello, Chief Investment Officer at GAMA Asset Management, stated that bid-ask spreads have widened significantly, leading to a general reduction in position sizes among market participants. This tightening of liquidity has further amplified price volatility, creating a vicious cycle.
Significant cracks appear in the US Treasury market.
Rising inflation risks have deterred investors, severely impacting the US Treasury market. According to Morgan Stanley data, the spread between new two-year Treasury bonds widened by approximately 27% in March compared to February, reflecting traders charging higher premiums to cover risk.
Tom di Galoma, Managing Director of Global Interest Rate Trading at brokerage firm Mischler Financial, pointed out that many institutions suffered losses in the US Treasury market, leading to reduced participation from both buyers and sellers, further impairing liquidity. Eli Carter, US Interest Rate Strategist at Morgan Stanley, emphasized that while trading volume remains high, a large portion of it consists of closing out positions or stop-loss orders.
European hedge fund sell-off exacerbates volatility.
In Europe, hedge funds' rapid sell-offs in the bond market have amplified volatility. The Bank of England is particularly concerned about this risk, as hedge funds have accounted for more than 50% of trading volume in the UK and Eurozone government bond markets in recent years.
Hedge funds suffered significant losses on trades betting on a Bank of England rate cut, a steepening yield curve, and a continued narrow spread between Italian and German government bonds. Daniel Aksan, co-head of Morgan Stanley's EMEA interest rate practice, said that liquidity in the short-term interest rate futures market shrank to as little as 10% of normal levels, reminiscent of the pandemic period.
Absence of market makers in the gold market
Gold, a traditional safe-haven asset, has seen a significant pullback this month after a record surge in 2025. Mukesh Dave, chief investment officer of global arbitrage fund Aravali Asset Management, pointed out that market makers were completely absent on some trading days, indicating their unwillingness to take on any trading risk.
Dave's description reflects the prevailing risk aversion in the current market: "Right now, they don't want to make money or lose money; if they had a choice, they wouldn't want to be in the market at all."
Analysis of Market Risk Transmission Mechanism
Investors' eagerness to reduce risk and move to cash has led to a scarcity of buyers, further exacerbating market makers' hesitation. A sharp sell-off in European bonds, failed concentrated bets by hedge funds, and rising inflation expectations have created multiple pressures, collectively driving up transaction costs and reducing market depth.
Although trading has remained relatively stable so far, the liquidity crisis could worsen if the conflict escalates further or energy prices remain high.
Editor's Summary
The war with Iran has impacted global financial markets through both geopolitical risks and energy price fluctuations, leading to increased transaction costs and a significant decrease in liquidity. Core assets such as US Treasury bonds, European bonds, and gold have seen widening spreads and conservative market makers, while concentrated selling by hedge funds in this headwind environment has further amplified volatility. Regulators need to closely monitor this risk transmission, while market participants should be wary of the potential chain reactions triggered by insufficient liquidity. The duration of the war and the progress of peace talks will be key variables determining the speed of financial market recovery.
At 16:25 Beijing time, spot gold was trading at $4,532.14 per ounce.
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