Fed Hike Fears Grow as the Iran War Drags On but Borrowing Is Already More Expensive
Bond yields are higher and credit spreads are wider as the Iran conflict heads into a fourth week, tightening financial conditions and reigniting a debate that would have sounded far-fetched just weeks ago: could the Federal Reserve hike rates again?
The effective closure of the Strait of Hormuz has triggered a historic oil shock, pushing energy prices sharply higher and reviving concerns that inflation could accelerate at an unacceptable pace. That, in turn, has opened the door—at least in market chatter—to the possibility of additional Fed tightening.
“Our belief has been that it would probably keep the Fed on hold, rather than it actually, outright, hiking rates,” said Gennadiy Goldberg, head of U.S. interest-rates strategy at TD Securities. But he noted what policymakers want to avoid is “making the transitory mistake again.” “That’s really the worry,” he said.
Markets briefly pushed the odds of a Fed rate hike in 2026 above 20% on Tuesday, according to the CME FedWatch Tool. Those odds eased somewhat on Monday after President Donald Trump said he would pause threatened U.S. attacks on Iran’s energy infrastructure to allow time for talks—though Tehran denied any negotiations were taking place.
Oil prices remained volatile. Brent moved back above $100 a barrel on Tuesday after briefly dipping below that level a day earlier. WTI was about 4% higher, trading near $91.50 a barrel. With Hormuz effectively shut, U.S. and global oil futures are up roughly 60% and 69% year-to-date, respectively, according to FactSet.
Hormuz is not only an oil chokepoint. The waterway also carries about one-third of the world’s fertilizer, according to Dragonfly, a risk-analysis and security-intelligence service owned by Dow Jones. Prolonged disruption could lift food prices and increase food insecurity—especially if the closure causes a missed planting season.
“A large majority of this market is highly correlated to oil,” said George Catrambone, head of fixed income for the Americas at DWS. Beyond oil and fertilizer, he said Hormuz is also a key transit route for metals, aluminum products, and copper. With U.S. wage growth already showing signs of slowing and personal savings declining, higher prices for oil, gas, and other commodities could raise fresh concerns about consumption and growth in the second half of the year. “It’s taxing to American consumers,” Catrambone said.
Even with rising odds of a Fed hike, Catrambone remains in the camp that the central bank would be more likely to cut rates to support the economy if oil stays elevated—rather than hike—highlighting the push-and-pull between inflation risks and growth risks.
Meanwhile, borrowing costs have already moved higher since the U.S. and Israel attacked Iran on Feb. 28. The benchmark 10-year Treasury yield was near 4.38% on Tuesday, up from below 4% in October, according to Dow Jones Market Data. Higher yields translate into higher borrowing costs for households, businesses, and the federal government.
Many high-quality U.S. companies have also pulled forward funding plans in early 2026, said Kyle Stegemeyer, head of investment-grade debt capital markets and syndicate at U.S. Bank. That has helped drive near-record weekly bond issuance, alongside a modest widening in credit spreads. Treasury yields form the base rate for new bond deals, with an added spread to compensate investors for credit risk. The jump in borrowing costs is partly linked to the Iran war—but also to large funding needs tied to the ongoing AI buildout.
Amazon, Oracle, and Alphabet have already issued bonds this year linked to AI investment plans, while Meta and Microsoft may still be waiting in the wings.
“Every time you get one out of the way, you are still looking over your shoulder to see if something else is to come,” said Matt Brill, Invesco’s head of North America investment-grade credit. Beyond supply, he’s focused on how long the Iran conflict lasts—and what it means for oil prices. “The market would clearly prefer it be done quicker,” he said.
Newsmaker Insight : even as investors debate whether an oil-driven inflation shock could push the Fed toward hiking, financial conditions have already tightened materially. With yields higher, spreads wider, and energy risks still elevated, markets remain highly sensitive to every headline out of the Middle East—and to every tick in oil.
Source : Newsmaker.id
