Interest rate strategists at Natixis stated that joint US-Israeli strikes on Iran have heightened risks to economic growth and potential supply chain disruptions. This is expected to weigh on short-term Treasury yields while pushing long-term yields higher, prompting the firm to recommend positioning for a steeper yield curve.

"Although it is still early to assess the full impact following the latest US military action against Iran, we believe the outcome of these strikes increases the risk of lower front-end yields and higher long-end yields, both on a relative and absolute basis," wrote John Briggs, head of US rates strategy at Natixis, in a report on Monday.

Natixis advised initiating a steepening trade on the 2s10s US Treasury curve at 56.5 basis points, targeting 85 basis points, with a stop-loss set if the closing level falls below 46 basis points.

Additionally, the firm exited its short position on 5-year US Treasuries within a 2s5s10s butterfly strategy, reversing its previous bearish stance. It noted that "the US rates market may be underestimating geopolitical tail risks."

Regarding short-term yields, Briggs commented, "Given the US government's indication that strikes could continue for weeks and uncertainty around Iran's future leadership, we believe the front end should reflect additional risk premium."

"It is difficult to see how this creates any upside risk to growth," he added.

On long-term yields, Briggs further explained, "In the post-pandemic era, with supply chains more fragile, shocks are often perceived as inflationary factors rather than deflationary, as they might have been in the past."

The immediate market reaction on Monday was described as "injecting more term premium, which we view as necessary given rising global structural uncertainty."