The increasingly fragile prospects for a ceasefire between the US, Israel, and Iran are compelling global stock and bond traders to refocus on inflation, significantly reinforcing hawkish expectations that interest rate policies will remain near historical highs for an extended period. Persistently elevated energy costs are expected to substantially increase global price pressures, which were already heightened prior to the Iran conflict. This is leading markets to scale back expectations for Federal Reserve rate cuts due to a sharp rise in inflation and even "stagflation" expectations. Some participants have begun pricing in the possibility that the Fed and other global central banks might resume interest rate hikes. This shift has become a primary consideration for investors and professional traders in both equity and fixed-income assets.
This change in the dominant market narrative highlights how quickly sentiment can shift against a backdrop of unpredictable geopolitical developments. The latest round of US-Iran talks has broken down, and oil prices remain well above pre-conflict levels. Multiple clear signs indicate that expectations for rising global inflation, and even stagflation, are becoming increasingly difficult to ignore. The "higher-for-longer" narrative is now posing a major challenge to the recently clearer and more fervent expectations for a new "dual bull market" trajectory in stocks and bonds, which had been fueled by the prospect of a two-week US-Iran ceasefire.
Following the failure to reach a US-Iran peace agreement over the weekend and the temporary halt in negotiations, the key concern for investors in the $31 trillion US Treasury market is undoubtedly that prolonged high costs for traditional oil and gas energy could exacerbate already elevated price pressures, potentially shattering Fed rate cut expectations entirely. Traders and strategists from global fixed-income investment giants, including Pacific Investment Management Co., Brandywine Global Investment Management, and Natixis North America, are leaning towards abandoning expectations for a new bull market in US Treasuries. Instead, they are preparing for the yield curve to remain elevated, with most unwilling to make significant asset allocation changes until they have a clearer view on the inflation outlook.
The breakdown of weekend ceasefire talks, temporarily ending hopes for a long-term diplomatic truce, means the optimistic chain of "ceasefire -> falling oil prices -> easing inflation -> Fed restarting rate cuts -> simultaneous strength in stocks and bonds" is facing a significant stress test. While news of a potential two-week ceasefire on April 8th did trigger a classic risk-on rebound, notably with European stocks posting their largest single-day gain in nearly four years, the subsequent failure of talks on April 12th has caused markets to reprice conflict risks and energy supply disruptions. WTI crude futures surged over 10% at Monday's open, breaking the critical $105 barrier, demonstrating the fragility of the ceasefire optimism.
The US government's CPI data for March, released last Friday, showed the consumer price index registering its largest monthly increase since 2022. This pushed the 10-year US Treasury yield above the 4.3% level and prompted traders to sharply reduce bets on Fed rate cuts this year. Some interest rate futures traders have even begun pricing in the possibility that the Fed could restart its hiking cycle as early as late 2026 or 2027. John Briggs, US利率策略主管 at Natixis, stated, "The pendulum has indeed swung back toward inflation and stagflation. The US non-farm payrolls market is stable at best and structurally not very vibrant, but for now, inflation and stagflation are the issues on the table."
As illustrated, market predictions for the Fed's policy path have turned notably more hawkish. Swap curve trajectories indicate the probability of a 25-basis-point cut by year-end has diminished to just around 20%. This shift underscores the rapid change in core market narrative: with oil prices continuing to trade well above pre-conflict levels, the factor of resurgent inflation is becoming increasingly difficult to ignore.
Many stock and bond investors must also contend with the possibility that prolonged geopolitical conflict could ultimately drag on global economic growth. However, the more immediate question is how long still-high oil and gas energy costs will continue to be aggressively passed through to consumer prices. Concurrently, the overall US non-farm labor market remains robust. March non-farm payrolls recorded the largest increase since late 2024, and the unemployment rate unexpectedly fell to 4.3%, further undermining the case for near-term Fed policy easing.
Kevin Flanagan, Head of Investment Strategy at WisdomTree, suggested it will take "at least three more months to get a clearer picture of the inflation path." He added that with inflation still about one percentage point above the Fed's target and unemployment hovering near 4.5%, the urgency for the Fed and other global central banks "to consider cutting rates from here is not as high as it was at the beginning of the year or late last year."
Traders in the interest rate futures market have significantly adjusted their policy expectations, pushing back the timing of the next expected 25-basis-point Fed rate cut to around mid-2027. Some traders have even begun pricing in the possibility of the Fed returning to a hiking path during this period. Prior to the outbreak of the Iran conflict, the market had priced in as many as two rate cuts for this year. The Fed has held rates steady since the FOMC lowered the policy rate range to 3.5%-3.75% last December.
Meanwhile, lingering doubts about the sustainability of any ceasefire, the status of large vessels in the Strait of Hormuz, and the trajectory of oil prices continue to pressure the front end of the US Treasury yield curve, primarily due to evolving expectations for Fed and global central bank policy.
Andrew Jackson, Head of Investments at Vontobel Asset Management, noted, "In a way, the Fed's job has become slightly easier because they can say there's uncertainty about how medium-term inflation will evolve." He suggested a Fed that is "highly likely to remain on hold for longer than previously expected" makes the three-to-five-year segment of the yield curve relatively more attractive for investment.
Some prefer to wait and see for now. Jack McIntyre, Portfolio Manager at Brandywine Global Investment Management, said, "If the US-Iran ceasefire holds and oil prices show weakness, the market's focus will shift back to the labor market." He maintains an underweight position in US Treasuries, adding, "If the facts change, we will adjust our views quickly."
The March inflation report showed prices rose a substantial 0.9% month-over-month, largely driven by a surge in gasoline prices, while core prices excluding food and energy came in slightly below expectations. The overall increase was largely in line with forecasts, following strong pricing signals from companies like Delta Air Lines and the US Postal Service.
Molly Brooks, Senior US利率组合 Strategist at TD Securities, commented, "In the absence of any growth deterioration, the Fed needs to first see this price spike, and then see several consecutive reports showing inflation is a temporary shock and moderating, before feeling comfortable with the prospect of continuing rate cuts. The Fed's dual mandate is now more balanced, but recent labor market data has shown excessive resilience."
Minutes from the Fed's March 17-18 meeting revealed that even before the geopolitical conflict erupted, Fed officials saw two-sided risks, with a vast majority citing upside risks to inflation and downside risks to employment.
Daniel Ivascyn, Chief Investment Officer at Pimco, stated that this tension is now being exacerbated by rising prices for traditional energy sources like oil and gas, which have created a "significant supply-side inflation shock." He said, "For now, inflation remains high, and you see broader weakness in financial assets like stocks and bonds. A new wave of inflation is a real market risk." The firm favors adding higher-quality blue-chip bond assets on dips while seeking opportunities arising from any market dislocations.
Amid the evolving Fed policy outlook, one resilient "market anchor" remains: the 10-year US Treasury yield has largely oscillated between 4% and 4.5%, averaging around 4.25% since mid-2023. As shown, US Treasury yields remain trading near multi-year median levels.
WisdomTree's Flanagan noted, "There is still a great deal of uncertainty. The 10-year yield is back in the relative middle of its longer-term range, which is not good news for risk assets like stocks and cryptocurrencies."
The 10-year US Treasury yield, often called the "anchor for global asset pricing," could pose a renewed valuation threat to the world's hottest risk assets—such as high-yield corporate bonds, tech stocks, and cryptocurrencies—if it continues to rise driven by fiscal stimulus-induced term premiums. A sustained rise in yields for 10-year and longer-dated US Treasuries equates to "significantly higher funding costs + weakening liquidity expectations + an expanding macroeconomic denominator" occurring simultaneously for core risk assets like equities, cryptocurrencies, and high-yield corporate bonds.
Theoretically, the 10-year yield corresponds to the risk-free rate (r) in the denominator of crucial equity valuation models like the DCF model. If other factors, particularly cash flow expectations in the numerator, remain unchanged—for instance, during an earnings season vacuum lacking positive catalysts—higher or persistently high denominator levels can lead to valuation compression for risk assets trading at historical highs, such as AI-related tech stocks, high-yield corporate bonds, and cryptocurrencies.
For the bond market, recently released economic data is pulling the dominant narrative back towards "inflation being more urgent than growth" and the "higher-for-longer" scenario, suggesting the recently recovering bond market may struggle. For global equity markets, including popular AI tech stocks, the optimistic sentiment fueled by ceasefire hopes continues to face a major test. Beyond the valuation risks from a rising "global asset pricing anchor," another core issue is the resurgence of a stagflation-style trade setup: high baseline discount rates, rising energy and transport costs, consumer spending and budgets eroded by gasoline prices, alongside downward revisions to global growth expectations. The IMF Managing Director has explicitly warned that "all roads lead to higher prices and slower growth," with the World Bank and IMF concurrently revising growth forecasts down and inflation forecasts up. US consumer sentiment has deteriorated significantly due to gasoline price shocks. This stagflationary macro setup is extremely unfavorable for the "dual bull market" trajectory, as it undermines the duration logic in bond markets and hurts long-term earnings and valuation logic for stocks, particularly broad market indices and high-beta, high-growth investment themes.
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