US bond markets are losing patience over the prolonged closure of the Strait of Hormuz. Last week, the US Treasury 10Y and 30Y yields rose above 4.50% and 5.00%, respectively, warning of a de-anchoring of long-term inflation expectations. Since Operation Epic Fury began, the futures market has shifted from pricing Fed cuts this year to a rate hike in late 2026. While the USD looks buoyed by the higher-for-longer yield advantage, this strength masks underlying structural vulnerabilities.
Despite President Donald Trump’s preference for lower interest rates, the market knows that newly confirmed Fed Chair Kevin Warsh has a history as an inflation hawk. Warsh's stated desire to shrink the Fed’s balance sheet clashes with the Treasury’s need to issue debt to cover the fiscal deficit, now pressured by the US Supreme Court and trade courts’ rulings against Trump’s global tariffs, and by the additional defence bill for the Iran conflict.
Are bond vigilantes stripping away the Trump administration's leverage, turning Hormuz from a geopolitical chess piece into an urgent fiscal trap that the Treasury must defuse to avert a structural funding crisis? Last week, US Treasury Secretary Scott Bessent’s meeting with Finance Minister Satsuki Katayama in Tokyo to coordinate JPY policy implied a risk that Japan may liquidate its US Treasury holdings to defend the JPY at the critical 160 per USD threshold.
Hence, President Trump urgently needs a strategic off-ramp from the Iran conflict to avoid crude oil prices from pushing to new highs, as bond yields have. During his summit with Chinese President Xi Jinping last week, Trump significantly adjusted his stance, issuing explicit warnings against Taiwan independence, a move designed to reset Beijing’s cooperation while fundamentally correcting the domestic and international perception of Trump as a "war president" ahead of the November midterm elections. The preliminary creation of the "Boards of Trade and Investment" with China also marked a tactical cooling of Trump’s aggressive trade policies toward "transactional stability", which is less about global goodwill and more about a calculated retreat from a maximum-pressure campaign that ran into a wall of geopolitical reality.
Washington and Tehran may be pursuing back-channel diplomacy by pushing the complex nuclear issue to later stages of the negotiation to focus on immediate and pragmatic measures to ease the Hormuz chokepoint. Bessent has heavily leveraged this diplomatic de-escalation, pointing to backwardation in the oil market, which shows spot prices much higher than futures prices for the latter half of the year. Backed by the imminent risk of a wave of non-OPEC supply hitting the market as alternative oil routes solidify, the administration is attempting to convince bond markets that the current inflationary pulse is transitory, buying the Treasury the breathing room it needs to navigate its structural funding dilemma.
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Ralph Waldo Emerson
May 18 in history
Following the fall of the Berlin Wall, the finance ministers of West and East Germany signed a treaty in 1990 that introduced the Deutsche Mark as the official currency.
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