MW Bonds may be the real winner now that the world economy has sidestepped a historic oil crisis
By Brett Arends
The Iran crisis and the closure of the Strait of Hormuz threatened 'the largest geopolitical oil supply disruption in history,' the Dallas Fed warned
"Iran begged for this cease-fire," U.S. Defense Secretary Pete Hegseth said.
The Iran crisis and the closure of the Strait of Hormuz threatened "the largest geopolitical oil supply disruption in history" and a U.S. energy crisis "between two and three times as large" as the crises of 1973, 1979 and 1990, the Federal Reserve Bank of Dallas warned shortly before President Donald Trump's latest deadline expired on Tuesday.
Those previous crises tipped the economy into stagflation and recession.
Read: Today's stock-market report
Without a resolution, the current crisis threatened to send oil prices rocketing as high as $167 a barrel by October and to add nearly 1.5 percentage points to the inflation rate, the Dallas Fed added. That would have derailed the economy, devastated Trump's party in the midterm elections and prevented any incoming Federal Reserve chair from slashing short-term interest rates as the president has repeatedly demanded.
Whether the Dallas Fed's economic analysis and warning was communicated to the White House, and whether such fears played a part in the president's decision to call a halt to the bombing of Iran, isn't known.
The Iranian government responded to the attacks on that country by effectively closing the Strait of Hormuz, through which 20% of the world's oil supplies pass in normal times. The Dallas Fed analyzed what would happen to the U.S. economy if the current crisis lasted one, two or even three quarters.
"Closing the Strait of Hormuz for one, two or three quarters would increase ... inflation in 2026 by 0.35, 0.79 and 1.47 percentage points, respectively," the bank concluded. For this calculation, it used the personal consumption expenditure or PCE index, the Federal Reserve's preferred measure of inflation, and compared likely prices in this year's fourth quarter with those a year earlier.
A 1970s-style outcome, or anything close to it, would have been enough to make anyone shudder - but especially retirees and others living on fixed or semi-fixed incomes.
Social Security's cost-of-living adjustments are made a year in arrears, so if your costs rose this year, your Social Security payments wouldn't go up in response until 2027. An inflation surge that peaks in the fourth quarter of this year would be especially harmful, because annual Social Security COLAs are calculated by comparing prices in the third quarter of the year with the third quarter of the previous year.
News of the two-week cease-fire sparked huge relief rallies in the stock market and caused a plunge in the price of oil. The latter seems to be the best financial barometer of the state of the crisis.
The bond market's response so far has been more muted. That may represent an opportunity. Bonds sold off sharply when the crisis began, on fears that it would - as the Dallas Fed warns - cause a sharp rise in inflation. Higher inflation is bad for bonds, because it reduces the real purchasing-power value of future coupon payments. This causes bond prices to fall and the yield or interest rate to rise. (Bonds are like seesaws: When the price falls, the yield rises, and vice versa.)
News of the cease-fire has caused bond prices to rise modestly and the yield to fall - but by less than you might expect. The yield on the benchmark 10-year Treasury note BX:TMUBMUSD10Y, for example, fell from 4.34% to 4.28%. That leaves it far above the 3.97% level seen just before the U.S. and Israel began bombing Iran at the end of February. The yield on BAA-rated corporate bonds, the bottom tier of blue-chip investment grades, fell from about 6.2% on Friday to 6.1%, but in late February it was below 5.8%. Bankrate reports that you can still get federally insured certificates of deposit paying up to 4% for as long as five years.
These all may seem particularly reasonable if you figure that the turmoil of recent weeks may cause an economic slowdown.
Now read: Stock market celebrates the Iran cease-fire, but bond market shows we're not out of the woods yet
-Brett Arends
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April 08, 2026 16:46 ET (20:46 GMT)
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