Financial markets are grappling with an unexpected disconnect: despite what appears to be a resolution to the Middle East conflict, bond yields remain elevated rather than falling. The Strait of Hormuz has reopened following a deal with Iran, and oil prices have dropped roughly a third from their peaks, easing fears of summer shortages and $200-per-barrel crude.

During the crisis escalation, inflation expectations marched in lockstep with oil prices, as traders priced in mechanical cost pressures through one-year and two-year US inflation swaps. These instruments reflect market expectations for price increases, particularly from energy costs, though not necessarily sustained inflation cycles.

The relationship between inflation hedges and short-dated Treasuries held steady through mid-May, but then shifted as Fed policy expectations evolved. Markets now price in a tougher stance from the Federal Reserve, viewing the central bank as less accommodative under its current leadership.

Recent hawkish signals reinforced this view: April minutes suggesting continued tightening, stronger-than-expected personal consumption expenditure data, elevated CPI prints, robust consumer spending, and solid payroll reports. The post-Fed market reaction showed the dollar strengthening against stocks, bonds, gold and crypto. President Donald Trump's preference for low rates has been overtaken by market reality, leaving bond yields stranded at higher levels and the Fed pivoting toward renewed tightening.