The US/Israel-Iran conflict has driven up Brent crude prices to USD 91/barrel (December futures) and USD 115/barrel (spot). Diesel and jet fuel costs have surged more than 50%, triggering demand destruction in industries such as aviation. Rising oil prices have spilled into broader inflation, with US core CPI at 3.8% YoY and core PPI at 5.2%, exceeding expectations. This inflationary pressure has pushed bond yields higher, with US 10-year Treasuries rising from 4.4% to 4.6%, German Bunds from 3.0% to 3.1%, and Japanese yields from 2.5% to 2.8%, driven by persistent inflation uncertainty.
Higher yields are putting pressure on equity valuations, particularly in the US where the S&P 500 and Nasdaq 100 indices are showing signs of weakness after a strong Q1 rally. Meanwhile, corporate bond yields have surged, with European investment-grade bonds at 3.8% (up from 3.2%) and US yields at 5.5% (up from 4.9%), offering higher long-term return potential. Whether the Strait of Hormuz remains closed (risking recession and supporting bonds) or reopens (easing inflation and aiding bonds), the current environment represents a compelling entry point for fixed income, particularly European investment-grade corporates.
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