economy
The bond market is flashing a warning over Iran. A veteran of energy geopolitics explains the risk
Daleep Singh knows how energy and markets intersect. He sees trouble ahead.
TL;DR
- High energy prices and the war in Iran are contributing to rising bond yields, increasing consumer debt costs.
- The 10-year Treasury yield, influenced by market forces, affects mortgages, auto loans, and credit card rates.
- Economist Daleep Singh believes the Federal Reserve should not be cutting rates currently, despite potential political pressure.
- Overlapping supply-side shocks like COVID-19, the Ukraine war, tariffs, and the Iran conflict suggest a structurally higher inflation environment.
- Rising global bond yields are a byproduct of increasing fiscal deficits and a hesitant central bank, leading to higher compensation for fiscal and inflation risks.
- The U.S. Treasury has tools to manage sharp spikes in long-term yields, potentially through financial repression measures.
- There is a probable risk of the 10-year Treasury yield reaching 5% in the near future, indicating a 'bond-vigilante trade' that requires a policy response.
- The conflict in Iran is characterized by a stalemate, with neither the U.S. nor Iran possessing escalation dominance.
- A potential deal involving Iran may take a month or two to materialize, with China possibly playing a role as a trusted third party.
- The global oil market faces a significant shortfall, with limited ability to increase output from regions like the Permian Basin, leading to a sustained risk premium on oil prices.
- Economic pressure on Iran is unlikely to force surrender, as autocratic regimes tend to develop workarounds for sanctions through barter, crypto, and non-dollar currencies.