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It began with bombs and missiles, but the war between Iran and the US is now increasingly being fought on the economic front: Tehran is blocking oil shipments, driving up inflation and interest rates worldwide. The US government is attempting to bring the regime to its knees through economic sanctions. “This may work, but such sanctions take time to take effect,” comments Thorsten Fischer, Managing Director and Head of Portfolio Management at Moventum AM. Until then, financial markets, the global economy and investors will suffer.

For the financial markets, this spells a great deal of turmoil. Yields on government bonds have climbed to levels not seen for many years. Yields on 30-year US Treasury bonds are approaching 5.3 per cent, a level last seen in 2007. The yield on the 10-year German government bond has risen to 3.3 per cent, whilst its Japanese counterpart has reached three per cent for the first time since 1996. The rise in interest rates is putting pressure on both private and public finances, as well as on the stock markets and the global economy.

The main reason for the high yields is the debt situation and inflation. In the eurozone, inflation stood at 3.3 per cent in August, driven by the war in Iran, which is making oil increasingly expensive. Energy prices rose by 14.3 per cent compared with the same month last year; in Germany, they shot up by more than ten per cent. The European Central Bank is therefore likely to raise key interest rates in September. The US Federal Reserve is signalling a similar move.

By blocking the Strait of Hormuz, Iran’s leadership is sending economic shockwaves across the globe. However, the US government is also applying economic pressure: Treasury Secretary Scott Bessent has announced a new wave of sanctions against Iran and the countries that trade with it. The aim is to ‘economically strangle’ the regime in order to win the war, which is unpopular in the US. “As American voters do not want another war in the Middle East, Trump is now trying to return to the pre-war sanctions policy,” says Fischer.

From the perspective of the increasingly powerful Revolutionary Guards, the regime’s very survival is also at stake. Fischer: “And in light of the US’s defeat – at least in strategic terms – the Iranian government now sees the long-awaited opportunity to force a US withdrawal from the Middle East. It has been pursuing this goal since the hostage crisis of 1979.”

In response, economic counter-pressure is being mobilised: Tehran has warned all states against participating in the US economic war, threatening that they will otherwise be regarded as enemies. At the same time, the Iranian parliament is pushing ahead with its plan to impose permanent tolls on ships passing through the Strait of Hormuz. This is an attempt to turn control of the route into a new, urgently needed source of state revenue. “Instead of de-escalation, this is causing the positions to harden,” says Fischer. “Washington is relying on financial strangulation, whilst Tehran is asserting de facto claims to sovereignty over one of the world’s most important oil transport routes.”

This has far-reaching consequences for investors. “As long as the Revolutionary Guards remain capable of attacking tankers, US bases and energy infrastructure in the Gulf, Iran effectively holds a veto over lasting peace,” said Fischer. Oil price and security risks in the Gulf are likely to remain structurally elevated, even if an acute global oil crisis has so far failed to materialise. The latest wave of sanctions, as well as Tehran’s move to enshrine transit fees in law, show that both sides are increasingly relying on economic rather than military leverage, thereby prolonging the uncertainty rather than resolving it.

For investors, this means continued higher premiums on energy prices, greater volatility and higher levels of inflation and bond yields. Security, defence and energy stocks remain tactically relevant, whilst safe-haven assets such as gold are attractive not only because of the global debt crisis. “The conflict,” says Fischer, “is more likely to become a permanent state of affairs than an event that can be resolved any time soon.”