Since the Strait of Hormuz closed on March 2, approximately 17.8 million barrels per day of global oil flows have been disrupted. In March alone, Brent crude rose nearly 60%, while WTI increased by about 53%. This marks the steepest monthly gain for Brent futures since their inception in 1988, surpassing the 46% rise during the 1990 Gulf War.
Logically, a sharp rise in oil prices should increase inflation expectations and push up bond yields. For most of the past two decades, oil prices and 10-year U.S. Treasury yields have indeed moved in tandem. But this time, they’ve moved in opposite directions.
In the first three weeks of March, both were moving upward in tandem. WTI rose 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 yields plummeted from 4.44% to 3.92%, dropping 52 basis points over three trading days and falling below the psychologically significant 4% level.
This is a classic "flight to safety," with the bond market signaling that growth risks have overtaken inflation risks. As the economic research firm Oxford Economics put it, "Growth risks are beginning to outweigh inflation risks." In other words, the market isn't ignoring inflation—it's simply more afraid of a recession.
This decoupling is uncommon, but whenever it occurs, the aftermath is rarely positive.
Over the past half-century, oil prices have surged by more than 35% in the short term on five occasions. In 1973, the oil embargo led to a 4.7% decline in U.S. GDP. In 1979, the Iranian Revolution caused global GDP to deviate from its trend growth by 3 percentage points. In 1990, the Gulf War triggered a brief U.S. recession. In 2008, oil prices peaked at $147; although the primary cause of the recession was the financial crisis, the oil shock accelerated economic downturn. The only exception was the 2022 oil price spike driven by the Russia-Ukraine war, which did not trigger a recession but resulted in the most severe inflation in 40 years.
The increase in March 2026 surpassed all of the above cases. According to research by Federal Reserve economist James Hamilton, there is no mechanical link between oil price shocks and recessions, but "the larger the net increase in oil prices, the more significant the suppression on consumption and investment." Goldman Sachs has raised its probability estimate for a U.S. recession to 30%, while consulting firm EY-Parthenon puts the figure at 40%.
The market's response speed is also unusually fast.
In early March, the CME FedWatch tool showed that the market expected three rate cuts for the year, with a 70% probability of a cut in June. Then oil prices rose steadily; on March 26, the U.S. import price index jumped 1.3%, and incoming Fed Chair Kevin Warsh hinted that the neutral rate might be higher. On that day, the probability of an interest rate hike within the year surged to 52%, and the 10-year yield reached 4.35%. FinancialContent labeled this day as "The Great Hawkish Pivot."
Four days later, the narrative completely reversed. On March 30, consumer confidence data plunged sharply, manufacturing unexpectedly contracted, and the 10-year yield dropped to 3.92%. According to FinancialContent, market expectations for a dovish pivot by the Fed in May rose to 65%. Goldman Sachs said the market had misjudged the direction of rate hikes. That day, Powell told undergraduates at Harvard that the Fed "hasn't reached the point where it must decide whether to look through the impacts of the war," but emphasized that "anchored inflation expectations are critical."
According to Axios, Powell’s remarks were interpreted by markets as indicating that the Fed neither wants to raise rates to combat inflation nor is eager to cut rates to stimulate the economy—but is instead 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, Citi strategist McCormick put it most plainly: stagflation lies ahead—bad for bonds, bad for stocks.
The stagflation period from 1973 to 1982 delivered a clear performance record for asset returns: gold achieved a real annualized return of +9.2%, the S&P GSCI commodity index rose 586% over the decade, and real estate returned +4.5%. In contrast, the S&P 500 posted a real annualized return of -2%, and long-term Treasuries returned -3%. According to NYU Stern’s historical data, long-term Treasuries alone suffered a single-year loss of -8.6% in 1979.
The traditional 60/40 portfolio (60% stocks + 40% bonds) is being squeezed by stagflation. Only real assets can outpace inflation. Société Générale forecasts an average Brent price of $125 in April, with a "credible peak" of $150. Goldman Sachs is slightly more moderate, predicting an average April price of $115, but assumes the Strait of Hormuz will resume normal operations within six weeks, with prices falling to $80 by year-end.
The bond market has already made a choice for everyone: between inflation and recession, it has bet on recession.