Since the closure of the Strait of Hormuz on March 2, global oil flows of approximately 17.8 million barrels per day have been severed. In March alone, Brent surged nearly 60%, while WTI rose by about 53%. This marks the steepest single-month increase in Brent futures since their inception in 1988, surpassing the previous record of 46% set during the 1990 Gulf War. Normally, a sharp spike in oil prices would fuel inflation expectations, pushing bond yields higher. For most of the past two decades, oil prices and the 10-year U.S. Treasury yield have exhibited a positive correlation. But this time, they moved in opposite directions.

For the first three weeks of March, both indicators rose in tandem: WTI climbed from $67 to $100, and the 10-year yield increased from 4.15% to 4.44%. The turning point occurred between March 27 and 30: oil prices continued to surge, while the 10-year yield plummeted from 4.44% to 3.92%—a drop of 52 basis points over three trading days, breaking below the psychologically significant 4% threshold. This is a textbook case of “flight-to-safety,” as the bond market signaled that growth risks now outweigh inflation risks. Oxford Economics put it plainly: “Growth risk has begun to dominate inflation risk.” In other words, markets aren’t indifferent to inflation—they’re more concerned about recession.

This divergence is rare, but every time it has occurred, the aftermath has been unfavorable.

Over the past half-century, there have been five instances where oil prices spiked by more than 35% within a short timeframe. In 1973, the oil embargo led to a 4.7% contraction in U.S. GDP. The 1979 Iranian Revolution caused global GDP to deviate from trend growth by 3 percentage points. The 1990 Gulf War triggered a brief U.S. recession. In 2008, oil peaked at $147, though the primary driver of that downturn was the financial crisis; still, the oil shock accelerated economic decline. The only exception was the 2022 oil surge driven by the Russia-Ukraine war, which did not trigger a recession—but came at the cost of the sharpest inflation surge in 40 years. The March 2026 price surge exceeds all prior cases. According to research by Federal Reserve economist James Hamilton, there’s no mechanical link between oil shocks and recessions, but “the greater the net rise in oil prices, the more pronounced the drag on consumption and investment.” Goldman Sachs has raised the probability of a U.S. recession to 30%, while consulting firm EY-Parthenon estimates it at 40%. Market reactions have also been unusually swift.

At the beginning of March, CME FedWatch indicated expectations for three rate cuts over the year, with a 70% probability of a June cut. Then oil prices kept rising. On March 26, the U.S. import price index jumped 1.3%, and incoming Fed Chair Kevin Warsh hinted that the neutral interest rate might be higher. That same day, the probability of a rate hike soared to 52%, and the 10-year yield hit 4.35%. FinancialContent labeled this day the “Great Hawkish Pivot.” Just four days later, the narrative completely reversed. On March 30, consumer confidence data plunged sharply, and manufacturing unexpectedly contracted—the 10-year yield nosedived to 3.92%. According to FinancialContent, the market’s bet on a dovish pivot by the Fed in May rose to 65%. Goldman Sachs noted that the market had misread the direction of policy shifts. Powell told undergraduates at Harvard that the Fed “hasn’t yet reached the point where it must decide whether to look through the war shock,” but emphasized that “anchoring inflation expectations is key.” According to Axios, the market interpreted Powell’s remarks as signaling that the Fed neither wants to raise rates to fight inflation nor rush to cut them to rescue the economy—it’s waiting, waiting to see whether this supply shock is temporary or persistent. But the bond market can’t wait any longer. If history is any guide, Citigroup strategist McCormick put it bluntly: stagflation lies ahead—bad for bonds, bad for equities.

The great stagflation era from 1973 to 1982 delivered a clear asset return profile. Gold posted a real annualized return of +9.2%, the S&P GSCI Commodity Index surged 586% over ten years, and real estate returned +4.5%. Meanwhile, the S&P 500 delivered a real annualized return of -2%, and long-term Treasuries returned -3%. According to NYU Stern historical data, long-term Treasuries lost -8.6% in 1979 alone. Traditional 60/40 portfolios (60% equities, 40% bonds) were squeezed in stagflation. Only tangible assets outperformed inflation. Société Générale forecasts a Brent average of $125 in April, with a “credible peak” reaching $150. Goldman is slightly more conservative, projecting a $115 April average, assuming the Strait of Hormuz reopens within six weeks and prices fall back to $80 by year-end. The bond market has already made a choice on behalf of all investors: between inflation and recession, it’s betting on recession.

Source: Lixiang