Please see today’s Daily Update from EPIC Investment Partners:
Financial markets have responded to the outbreak of hostilities in the Strait of Hormuz in familiar fashion. Oil has firmed, equities have wobbled and US Treasuries have sold off. The 10-year yield has climbed to around 4.16%, its fifth consecutive daily rise, as traders price the risk that higher energy costs could delay the Fed’s easing cycle.
At first glance the reaction makes sense. Any disruption to the Strait of Hormuz, the route for roughly a fifth of global oil shipments, raises the prospect of renewed inflation pressure. Even though Brent crude remains well below the levels that would normally trigger panic in energy markets, the logistical disruption is already becoming visible elsewhere.
Shipping companies have begun rerouting vessels around the Cape of Good Hope to avoid the Gulf, adding as much as two weeks to journeys between Asia and Europe. The additional distance sharply increases ton-mile demand, the shipping industry’s core measure of capacity, pushing freight rates higher. Maritime insurers have also raised war-risk premiums sharply, embedding additional costs into global trade.
The immediate market reaction has therefore been straightforward. Higher energy prices feed into headline inflation, prompting investors to push back expectations for interest-rate cuts. Futures markets have already shifted the likely timing of the Fed’s first move from July towards September.
Yet this inflation narrative captures only the first stage of the shock. The deeper issue lies in the interaction between energy prices and trade policy.
The Trump administration’s newly announced 15% global tariff regime arrives at the same moment energy prices are rising. Oil increases the cost of producing and transporting goods; tariffs raise the price at which those goods enter markets. Together they function less as a driver of inflation than as a tax on global growth.
Higher oil prices function as a tax on households and industry. When combined with the tariff regime, the result is a tightening of financial conditions independent of central bank policy. Consumers face higher fuel and transport costs while companies see margins squeezed by tariffs and rising input prices.
Previous energy shocks offer a useful guide to how markets process this adjustment. During the early stages of the 1990 Gulf War and again after Russia’s invasion of Ukraine in 2022, Treasury yields initially rose as markets focused on the inflation risk associated with higher oil prices.
Those moves proved temporary. As the economic consequences became clearer, weaker consumption, slower trade and declining industrial activity, investors returned to government bonds. The narrative shifted from inflation risk to growth risk, reflecting the reality that central banks cannot eliminate supply shocks by maintaining high interest rates indefinitely. What monetary policy eventually responds to is the demand destruction those shocks create.
The difference today is scale.
The Iranian revolution of 1979 removed roughly 5% of global oil supply from the market. Russia’s invasion of Ukraine disrupted trade flows but did not eliminate comparable volumes of production; oil was largely rerouted rather than removed.
A sustained disruption to shipping through the Strait of Hormuz would be far more severe. The passage carries roughly a fifth of global oil shipments and a substantial share of LNG exports. Even a partial closure therefore represents a supply shock several times larger than the historical episodes markets typically reference.
If the disruption to Gulf shipping proves prolonged, the global economy would be forced to absorb a shock affecting roughly 20% of seaborne energy flows; a scale of disruption historically associated not with inflationary booms but with recessions.
Bond markets tend to respond accordingly. Once the slowdown becomes visible in labour markets and industrial output, investors shift rapidly from pricing inflation risk to pricing economic contraction.
In past downturns, long-term Treasury yields have fallen by several hundred basis points from their pre-crisis levels. If the current shock were to trigger a comparable global slowdown, the move from today’s 4.16% 10-year yield could replicate a change of similar magnitude.
Please continue to check our blog content for advice, planning issues and the latest investment market and economic updates from leading investment houses.
Andrew Lloyd
06/03/2026