WEEK ENDING 6/12/2026
- Opening soon: the Strait of Hormuz
- Warsh between a Trump and a rate hike
- Swinging between Anthropic and SpaceX
A CITY DIFFERENT TAKE
On Sunday, the U.S. and Iran reached a peace deal. The deal includes reopening the Strait of Hormuz and resuming talks over Iran’s nuclear program. Both countries have agreed to cease the conflict. The U.S. has lifted its naval blockade. This time, the Iranian Foreign minister has announced a memorandum of understanding (MOU) that the official signing is scheduled for June 19. President Trump announced the deal on Truth Social as the “toll-free opening of Hormuz.”
Here is everything we know about the deal:
- The U.S. and Iran will both end competing blockades
- Both countries will not attack each other
- Military operations in Lebanon will end
- There will be a 60- day period of negotiations on Iran’s nuclear program
- Iran will receive sanction relief on its oil sales
What is unclear, however, is whether Iran's demands for billions in financial incentives will be met or whether access to its funds in overseas bank accounts will be frozen. As the terms unfold, we need to understand and be convinced that this is a credible ceasefire.
First things first — the reopening of the Strait of Hormuz. The market will watch AIS vessel tracking data in real time. Second, markets will look for a durable move in oil prices — not the post-announcement euphoria. Oil should sustain a price tag below $80a barrel. Third, the Lebanon ceasefire needs to last. Israel has explicitly refused. Until that piece is agreed on, the re-escalation risk is very much on the table. Finally, Iran’s frozen assets of more than $25 billion sequencing needs to clarified as it is perpetually conditional.
Closer to home, new Fed Chair Kevin Warsh must now reconcile the lower-rate message that helped win the president’s backing with inflation that is heating up again. The Consumer Price Index for the month of May climbed to 4.2% YoY, driven mostly by a rise in energy costs.
If, in good faith, we assume that the war is over, even with a signed agreement and declining oil prices, the bond market won't fully adjust until the FOMC's statement and dot plot show decreased inflation risk.
If we map the inflation path so far with the benefit of hindsight, it looks like this: an immediate hit in March and April, driven by gasoline prices, which was then reflected in the CPI data. We are now seeing an increase in packaging costs for petrochemical-based plastics, films, and containers. The average $100 crude for the month of March and April is being passed to the consumer in food and manufacturing costs.
We think that prices will remain elevated for the near future as increases make their way through the supply chain. Finally, we expect inflation to move through second-order effects from a sustained energy shock, showing up later in the year in food prices and a broader range of goods.
The Fed’s traditional preferred inflation measure (PCE) is at 3.3% YoY. The next release on June 25 projected at 3.4%, running 130 basis points higher than the Fed’s mandate for inflation. This means that even a signed, durable MOU does not give Warsh's Fed the cover to cut in September.
CHANGES IN RATES
TreasuryMarket
Treasury yields were lower for the whole week. The 2/10 spread is at 40 basis points, which is flat compared to historical averages as seen below.
The long-run averages are between 90–100 basis points. There are big borrowings slated for the second half of the year. For Q3 of this year, the borrowing estimate is a massive $671 billion.
Municipal Market
AAA general obligation municipal bond yields were the reverse of the Treasury market and saw incremental yield rise. Rates rallied as markets tried to absorb a big calendar. However, the base rate for the municipal curve is low. The 2/10 spread was 0.55%. Remember that the municipal curve is a steeper curve than the Treasury curve and average. The long-term average for the municipal curve is between 100 to 130 basis points. The reason for that is the muni market is retail-dominated in its demand at the short end and supply is concentrated at the long end.
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
The muni/Treasury ratios got some respite last week. However, they are still depressed. Municipalities continue looking very rich, playing into their associated seasonality.
Investment Grade Corporates
Investment grade corporate yield adjustments mirrored Treasury where credit rallied last week. The 2/10 spread is 86 basis points.
THIS WEEK IN WASHINGTON
On June 12, SpaceX went public with a $2.2 trillion valuation, marking the largest IPO ever, attracting $350 billion in demand, and making Musk the world's first trillionaire. Just two days later, Anthropic was effectively barred from global markets by a government order citing national security concerns. This happened in the same week and during the same AI boom, yet the outcomes are radically different. Clearly, political proximity plays a crucial role in success within both public and private markets.
While Musk and SpaceX received widespread praise, the market's valuation now reflects not only rockets and satellites but also space infrastructure and AI integration technologies that the U.S. government has essentially recognized as a critical platform.
Meanwhile, Amazon’s Andy Jassy, a major investor and cloud partner of Anthropic, approached the government about vulnerabilities in a competitor's model. The conflict of interest and the resolution favoring Amazon demonstrate that the market must incorporate governance and political alignment premiums. Earlier this year, Anthropic had conflicts with the Pentagon over military and surveillance uses of its technology, and the administration labeled the company a U.S. supply-chain risk, instructing agencies to phase out its products.
While not government-owned, this shift indicates that realignment is being encouraged. As AI investments mature, geopolitics increasingly influence these developments.
WHAT, ME WORRY ABOUT INFLATION?
The graph above contrasts a 5-year Breakeven Inflation Rate (this is the market-implied inflation rate) tracked weekly with the core PCE inflation rate. The 5-year Breakeven Inflation Rate finished the week of June 12 at 2.39%. The 10-year Breakeven Inflation Rate finished the period at 2.31%.
MUNICIPAL CREDIT
Last week's 10-year quality credit spread between BBB revenue bonds and AAA general obligation bonds was 0.86%, virtually unchanged week over week. The historical average credit spread is 1.67%.
TAXABLE CREDIT
Investment-grade spreads for the past week were at 87 basis points. The long-term average for investment grade is 1.56%. High-yield credit spreads are 2.60%.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Money market fund flows were negative over all categories.
Mutual Fund Flows (millions of dollars)
Mutual fund flows were largely positive. However, municipal high funds saw a reversal and negative fund flow.
ETF Fund Flows (millions of dollars)
Net ETF flows were mixed week over week.
SUPPLY OF NEW ISSUE BONDS
This is a holiday week, but the calendar is at $8.1 billion. The second half of 2026 is projected to be at $280 billion. The full year tax-exempt issuance is projected to be at $545 billion.
CONCLUSION
The Strait of Hormuz deal, if it holds, removes the incremental energy shock from the inflation calculus but does not undo the pipeline of price increases already working through the supply chain. Warsh's Fed has no cover to cut until the dot plot says otherwise, and with PCE running 130 basis points above mandate and Q3 Treasury borrowing at $671 billion. Meanwhile, the AI story is that political alignment is now a balance sheet variable, and the same week that produced the largest IPO in history also produced a government shutdown of a $965 billion company.
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