Macro/Rates
The economic impact of the current conflict in the Middle East hinges primarily on energy markets and uncertainty effects. The most acute risk is potential damage to transport infrastructure or disruption in the Strait of Hormuz, through which oil is transported. These events would materially weigh on global growth and risk assets through a sharp rise in oil prices, which acts as a tax on consumers and disproportionately hurts discretionary spending. At the same time, elevated uncertainty could delay investment if the conflict deepens or persists.
Rates markets initially rallied on risk aversion but quickly reversed, with US Treasury yields now higher across the curve. Short-dated inflation measures rose more than would typically be implied by the energy move alone, suggesting markets are assigning higher odds to a near-term inflation impulse. The US Federal Reserve (Fed) is likely to closely monitor inflation expectations and OPEC’s response to determine how persistent the energy shock may be and whether policy needs to adjust accordingly. Futures markets are currently pricing two interest-rate cuts in 2026, compared to one cut as of the Fed’s most recent projections.
Credit Markets
Credit spreads2 have widened modestly across both investment-grade and high yield. However, the primary drivers of spreads have recently been technical rather than geopolitical. Heavy supply, sector-specific repricing, and markdowns in private-credit portfolios have played a larger role in spread movements than conflict-related fundamentals. While geopolitics may add volatility at the margin, any de-escalation is not likely to serve as a catalyst for sustained spread tightening, in our view.
