Since the closure of the Strait of Hormuz on March 2, approximately 17.8 million barrels per day of global oil flow have been cut off. In March alone, Brent crude surged nearly 60%, while WTI rose about 53%. This marks the steepest monthly gain for the Brent contract since its inception in 1988, surpassing the 46% record set during the 1990 Gulf War.
Conventionally, soaring oil prices drive up inflation expectations, and bond yields should follow suit. For most of the past two decades, oil prices and the 10-year U.S. Treasury yield have indeed been positively correlated. But this time, they moved in opposite directions.
In the first three weeks of March, the two were still moving upward in sync. WTI rose from $67 to $100, while the 10-year yield climbed from 4.15% to 4.44%. The turning point occurred between March 27 and 30: oil prices continued to surge, but the yield plummeted from 4.44% to 3.92%, dropping 52 basis points in three trading sessions and breaking through the psychologically significant 4% level.
This was a classic "flight to safety," with the bond market making a judgment: growth risks have now outweighed inflation risks. As the economic firm Oxford Economics put it, "growth risks began to outweigh inflation risks." In other words, the market is not unafraid of inflation; it is more afraid of a recession.
This decoupling is not common, but whenever it occurs, the subsequent story tends to be unfavorable.
Over the past half-century, there have been five instances where oil prices surged more than 35% in a short period. During the 1973 oil embargo, U.S. GDP subsequently fell by 4.7%. The 1979 Iranian revolution caused global GDP to deviate from trend growth by 3 percentage points. The 1990 Gulf War led to a brief U.S. recession. In 2008, oil prices peaked at $147; although the primary cause of that recession was the financial crisis, the oil price shock accelerated the economic downturn. The only exception was the oil price surge driven by the 2022 Russia-Ukraine war, which did not trigger a recession but came at the cost of the most severe inflation in 40 years.
The surge in March 2026 exceeded all 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 greater the net increase in oil prices, the more significant the suppression of consumption and investment." Goldman Sachs has raised the probability of a U.S. recession to 30%, while consulting firm EY-Parthenon puts the figure at 40%.
The market's reaction speed was also unusually fast.
In early March, CME FedWatch showed the market expected three rate cuts for the year, with a 70% probability of a cut in June. Then, as oil prices continued to climb, the U.S. import price index jumped 1.3% on March 26, and incoming Fed Chair Kevin Warsh hinted that the neutral rate might be higher. That day, the probability of a rate hike within the year soared to 52%, and the 10-year yield touched 4.35%. FinancialContent defined this day as "The Great Hawkish Pivot."
Four days later, the narrative completely flipped. On March 30, consumer confidence data fell sharply, manufacturing unexpectedly contracted, and the 10-year yield plummeted to 3.92%. According to FinancialContent, market bets on a dovish pivot by the Fed in May rose to 65%. Goldman Sachs said the market had bet wrong on the direction of rate hikes. That same day, Powell told undergraduates at Harvard that the Fed "has not yet reached the moment where it must decide whether to look through the war shock," but emphasized that "the anchoring of inflation expectations is key."
According to Axios, Powell's remarks were interpreted by the market as: the Fed neither wants to raise rates to fight inflation nor is it in a hurry to cut rates to save the economy. Instead, it is waiting to see whether this supply shock is temporary or persistent. But the bond market can wait no longer.
If history is any guide, Citi strategist McCormick put it most bluntly: what lies ahead is stagflation, which is bad for bonds and bad for stocks.
The Great Stagflation from 1973 to 1982 delivered a report card on asset returns. Gold delivered an actual annualized return of +9.2%, the commodities index (S&P GSCI) surged 586% over the decade, and real estate gained +4.5%. In contrast, the S&P 500's actual annualized return was -2%, and long-term Treasuries returned -3%. According to NYU Stern historical data, long-term Treasuries suffered a -8.6% loss in 1979 alone.
The traditional 60/40 investment portfolio (60% stocks + 40% bonds) was caught in a squeeze during stagflation. Only physical assets outperformed inflation. Société Générale predicts Brent will average $125 in April, with a "credible peak" of $150. Goldman Sachs is slightly more moderate, forecasting an April average of $115, but assuming the Strait of Hormuz reopens within six weeks, falling to $80 by year-end.
The bond market has already made a choice for everyone: between inflation and recession, it is betting on recession.
