Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again. — John Maynard Keynes
Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.
Since U.S. and Israeli military operations in Iran began on Feb. 28, the price of WTI crude oil has gone up roughly 43%, from $67.02 on Feb. 27 to $95.73. The December 2026 SOFR futures implied yield is up about 48 basis points (bps) to 3.54% from 3.06% over the same period, suggesting that more than one anticipated Federal Reserve cut has been priced out of the market. The front end of the interest rate curve has pulled back expected cuts in step with the oil move.
The oil shock heightens inflation risk. The direct impact will appear in headline inflation first, followed by the second-round effects of rising freight and input costs. The market reaction has been straightforward: near-term inflation pricing lifted, and rate cuts moved out.
WTI gained 42.9% in 10 trading days at its peak on March 9, the biggest 10-day move since May 21, 2020, and a 99.8th percentile shock since 2006, meaning this move ranks in roughly the top .02% of all ten-day price changes over the last two decades.
About one-fifth of global petroleum liquids flow through the Strait of Hormuz, roughly 20 million barrels per day in 2024. That bottleneck puts a risk premium into crude even before disruptions start. Insurance and freight costs rise quickly, and inventory behavior shifts toward precaution.
The inflation swap curve, a real-time gauge of Consumer Price Index expectations, repriced higher, especially at the front, following the usual playbook for an oil shock. Since Feb. 27, the one-year zero-coupon inflation swap has gone up about 50 bps, with smaller moves further out. Near-term inflation risk is where energy shows up fastest, and that is where the pricing moved first.
U.S. Treasuries did not trade this as a clean flight to quality. Since Feb. 27, the one-year Treasury yield is up about 16 bps, and the two-year is up about 37 bps, consistent with less easing priced into the front end of the curve.
National pump prices have also started to respond. From Feb. 27 to March 11, gasoline rose to $3.60 from $2.98 per gallon (+20.8%), and diesel rose to $4.86 from $3.76 (+29.3%). This can pressure consumer spending, especially among lower-income households. Rising fuel prices also feed quickly into freight costs and squeeze margin-sensitive parts of the economy.
Fewer cuts priced into the curve raised discount rates. That repricing shows up immediately in the front end and then bleeds into equity valuation math.
Near-term inflation pricing and short rates are carrying the signal. The front end of inflation swaps has repriced sharply, and how long inflation expectations remain elevated will affect rates across the curve. Rising oil prices and inflation further complicates the Fed’s already difficult path balancing the labor market and inflation. The market is saying that there will be fewer rate cuts this year. Will that be sustained in the face of a labor market exhibiting some signs of weakness and a new Fed chair?
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
