Bond traders are scrambling for new strategies after an oil-driven inflation shock from the Iran war scuppered the popular bet on further Fed interest-rate cuts in 2026. Market sentiment flipped so dramatically that traders now see a 50% chance of a Fed rate hike by October, with global benchmark oil prices at their highest since 2022.

The selloff pushed Treasury yields to multi-month highs, with two-year rates reaching 3.9% and five-year yields surpassing 4% for the first time since July. The 10-year yield climbed to 4.39%, the highest since August. John Briggs at Natixis suggests it's time to "head for the sidelines" as predicting the war's trajectory remains a "tall task."

Fed Chair Powell added fuel to the shift by stating officials need to see progress on inflation before reducing rates. While some investors like Morgan Stanley's Andrew Szczurowski see a buying opportunity, George Catrambone at DWS warns that oil and Treasury yields cannot move higher in lockstep without one eventually pricing in economic downside risks.