Iran War Closes Strait of Hormuz, Crude Elevated Above $75: Global Bond Yields Rise on Inflation Shock

The escalating conflict in Iran and its impact on the Strait of Hormuz remains the dominant macro tail risk. The critical shipping chokepoint, through which 20% of global oil transits, has been effectively shut down, forcing re-routing of tankers and constraining supply. Oil prices have remained elevated, with Brent crude above $95 and WTI holding near or above $75, despite demand softness. This energy shock is feeding inflationThe rate at which prices rise across an economy. concerns across developed economies.

Japan's producer prices jumped by the most since 2014 in April, directly attributable to elevated oil costs. The Bank of Japan is now under pressure to raise rates further, with some Governing Council members suggesting that sustained high oil prices could force multiple hikes. Similarly, the European Central Bank's Yannis Stournaras warned that the ECB could be forced to hike if oil maintains current levels. This is stagflationary dynamic: growth fears mixed with rising cost-push inflationThe rate at which prices rise across an economy..

US Treasuries have sold off sharply, with yields rising across the curve. Back-to-back inflationThe rate at which prices rise across an economy. data, combined with energy prices and mounting political uncertainty, have sent investors fleeing global bond markets. The real yield on long-dated bonds has become less negative, making durationBond price sensitivity to interest rate changes. less attractive and equities less compelling on a risk-adjusted basis. Gold, traditionally an inflation hedge, has struggled as rising real yields attract cash. Copper has extended its retreat from recent highs, pressured by the stronger dollar and inflation-driven rate hike expectations.

The stalemate in Iran war resolution creates persistence. Trump mentioned that Xi offered to help resolve the conflict, but no formal ceasefire or deal appears imminent. If the conflict drags, oil remains elevated, and the inflationThe rate at which prices rise across an economy. shock persists, central banks will be forced into a tightening cycle even as growth slows. This is the stagflation scenario that equity bulls fear most. Conversely, if the Trump-Xi summit produces a surprise breakthrough on Iran (however unlikely), oil could fall sharply, relieving inflation pressure and allowing central banks to cut rates. For now, the base case is elevated oil, sticky inflation, and higher-for-longer rates.