EJFQ Credit Analysis | Inflation Threatens Bond Yields, Wall Street Rebounds Weakly

The Iran conflict is nearing a “full moon,” and U.S. President Trump shows signs of “shrinking back” (TACO). Iran states that non-hostile ships can pass through the Strait of Hormuz via negotiations. Markets are hopeful that the situation will clarify, causing oil prices to drop nearly 10% from recent highs, along with a general retreat in commodity prices.

Tracking 24 commodities including energy, metals, and agricultural products, the Bloomberg Commodity Index (BCOM) rebounded after falling below 100 during the “tariff chaos” in April last year. In the fourth quarter, driven by sharp increases in gold and silver prices, the index accelerated upward, reaching a peak of 142.5958 in early March during the initial US and Israel attacks on Iran—its highest in over 13 years. Since then, it has significantly declined, dropping to 130.4015 during Asian trading yesterday. This indicates that oil prices have not surged again and reflects market concerns that high energy costs are impacting supply chains, increasing the risk of a global economic slowdown and reducing demand for other commodities.

As shown in the accompanying chart, the yield on the US 2-year Treasury note, which initially moved similarly to the BCOM, did not decline with commodity prices in late March. Instead, it continued to rise, briefly surpassing 4%, indicating that interest rate-sensitive short-term debt yields have peaked, suggesting investors expect rising inflation. Rob Kapito, President of BlackRock, stated plainly that even if the war ends soon, the risks it brings will still pressure economic growth, and the elevated inflation is unlikely to fully ease.

It is worth noting that the high short-term bond yields are not unique to the US; the Eurozone and Japan face even more severe situations. Recently, Germany’s 2-year bond yield reached 2.669%, the highest since July 2024, while Japan’s 2-year yield broke above 1.3% for the first time since August 1995. This indicates that bond investors worldwide have long recognized inflation as a “global issue.”

According to the European Central Bank’s latest economic forecast released on March 11, the 2026 inflation rate (HICP year-over-year change) was raised from 1.9% at the end of last year to 2.6%. Meanwhile, the Federal Reserve’s updated quarterly economic projections (SEP) after last week’s policy meeting show the personal consumption expenditures (PCE) inflation forecast for this year increased from 2.4% to 2.7%. The central bank seems to accept that inflation is inevitable, and monetary policy will need to adjust accordingly, with the likelihood of rates “shifting from easing to tightening” clearly increasing.

In theory, high short-term yields will exert systemic pressure on the stock market, reducing corporate borrowing and capital expenditure, leading to valuation contractions. Additionally, as existing debt is refinanced over time, costs will gradually rise, ultimately weakening overall profit quality—clearly negative for stocks. This explains why U.S. stocks are expected to rebound more convincingly when short-term yields fall sharply. Conversely, if 2-year yields remain high, stock markets may struggle to improve.

As Goldman Sachs analysts warn, the ongoing US-Iran ceasefire negotiations create a binary environment for investors. With stock risk premiums near zero (meaning little extra return for risk-taking), and US market valuations still at historically high levels, it is currently prudent to accelerate profit-taking and hold cash—“cash is king”—as a temporary strategy.

HSBC Investment Research Department

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