The Iran conflict is now a persistent macro variable, not a transient geopolitical shock. For us, the two factors front and center are the duration and the breadth of this conflict.
Four factors will determine the path.
The base case remains a negotiated resolution by mid-2026, likely around a modified nuclear framework. But the range of outcomes is wide, the political support for this war is thin, and the market has not fully priced a prolonged scenario. Caution on the duration of this conflict and vigilance on the inflation trajectory remains warranted.
The Fed's inflation challenge was already well-established before Operation Epic Fury began. Core PCE, the Fed's preferred measure, rose a firm 0.4% in January, pushing the year-over-year rate to 3.1% and marking nearly five years above the Fed's 2.5% comfort zone as we view it. February is tracking another 0.4% gain, which would make three consecutive months at or above 3.0% year-over-year and push three-month annualized core PCE to approximately 4.6%. Core CPI has similarly accelerated to 3.0% on a three-month annualized basis. This was not a one-month aberration driven by energy; it reflects broad-based stickiness in services inflation, with legal services, software, and shelter components all contributing at various points. The critical implication is that the Fed's inflation problem predates the war and will outlast any near-term ceasefire. The oil shock is an accelerant, not the underlying cause.
The FOMC meets this week and will almost certainly hold rates steady for the second consecutive meeting. The Fed's traditional playbook in an adverse supply shock is to look through the inflationary impulse and focus on downside growth risks. That response, however, depends on the Fed's inflation-fighting credibility being unquestioned, an assumption that is less secure today than in prior cycles. After nearly five years above 2.5% and a painful 2022-2023 inflation surge, the Fed has limited room to signal accommodation without risking an unmooring of inflation expectations. Compounding this is the looming leadership transition at the Fed and ongoing political pressure from the White House for rate cuts, factors that cloud the institutional independence narrative precisely when it matters most.
TreasuryMarket
Throughout the week, the Treasury market endured a yield rally (i.e., yields rising). The 10-year Treasury yield rose by 33 basis points. The 2/10 spread flattened a bit at 0.56% over the week.
For our readers, bonds are doing what bonds are supposed to do: pay you more than inflation. The real yield on the 10-year Treasury today is approximately 118 basis points. The 10-year is offering 4.28% in a world where core PCE is running at 3.1%. You are being paid above inflation to own duration — right now, today, with no heroic assumptions required. The long-term average real yield on the 10-year Treasury is 186 basis points. We are below that average, which means rates could move higher from here and the fundamental value proposition of owning fixed income would remain intact. This is not a crisis environment for bond investors. It is, by the numbers, a reasonably compensated one.
We stress-tested inflation to see if the math for investing in bonds works. And it does.
Run the bear case on inflation scenario to its logical conclusion: core PCE accelerates to 4.0%. Even there, the 10-year at 4.28% (as of March 13) still delivers approximately 28 basis points of positive real yield. The floor holds. You do not need the inflation picture to improve to justify owning bonds. The real yield does not go negative unless the 10-year stays at current levels and core PCE breaks sustainably above 4.28% — a scenario that would require the Fed to be not just behind the curve but entirely absent from the field.
Municipal Market
The muni market followed the Treasury market in yield rally. The 2/10 spread for last week was at 62 basis points, 11 basis points higher than the week before.
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
Treasury-muni ratios keep widening.
Investment Grade Corporates
Investment-grade corporate bond yields increased materially.
The U.S. and Israel launched Operation Epic Fury on February 28, assassinating Supreme Leader Khamenei and targeting Iran's nuclear and missile infrastructure. Iran has retaliated with waves of drones and ballistic missiles across Gulf states and Israel, triggering a parallel conflict with Hezbollah in Lebanon. As of this writing, Iran's missile capacity is reportedly down 90% and drone capacity down 95%, but the new supreme leader, Khamenei's son Mojtaba, has vowed attacks will continue until U.S. bases in the region close.
The Strait of Hormuz has been declared closed by Iran since March 4, disrupting roughly 27% of global seaborne oil trade, the largest supply disruption in the history of global oil markets. At least 16 commercial vessels have been attacked. The IEA has authorized emergency reserve releases, and President Trump is calling for a naval coalition to reopen the strait.
Market Impact
Brent crude surged from roughly $70 to roughly $110 per barrel; European natural gas prices nearly doubled. Analysts see sustained prices of $100+ if the strait remains disrupted. The IEA's record reserve release has had limited effect so far.
Fixed Income
10-year Treasury yields have risen as markets price in oil-driven inflation and reduced odds of Fed rate cuts. Bond prices are under pressure across durations. The dollar has strengthened roughly 1.4% YTD, complicating the administration's goals on borrowing costs and trade.
Safe Havens
Gold has surpassed $5,300. USD has strengthened against major currencies. War risk insurance premiums have spiked significantly.
The administration launched the war without a congressional declaration or authorization for use of military force, framing it as a "limited operation" rather than a war. The House rejected a War Powers resolution 219-212 and the Senate defeated a similar measure along party lines, the narrowest possible margins.
With roughly three-fifths of Americans opposing the war, public support is weak and eroding. Democrats are pursuing the appropriations process as a next lever. Several Republicans have flagged that ground troops or sustained casualties would change their calculus. A key legal clock is also running: the 1973 War Powers Act requires congressional authorization within 60 days of deployment, a deadline that arrives in late April to early May.
The key question plaguing the world is: when does this conflict end? Three possible outcomes are being floated.
Among many experts, a mid-2026 resolution is the base case, but that is far from certain. The multi-front expansion into Lebanon adds significant complexity to any exit scenario.
The war is costing about $891.4 million per day, according to a think tank based in Washington, DC, that analyzed the information the Pentagon has shared about targets it struck and the assets involved in the operation.” War is not cheap
And that estimate may be on the low side — a pretty bold expenditure for a debtor nation.
The 5-year Breakeven Inflation Rate finished the week of March 13 at 2.61%, 5 basis points higher than last week. The graph above contrasts a 5-year breakeven inflation rate tracked weekly. This is the market implied inflation rate. We track this relative to core PCE, the Fed’s favorite inflation measure. For the month of January, the rate was 3%. We use two measures here to get a holistic view of inflation. The 10-year Breakeven Inflation Rate finished the period at 2.36%, 1 basis points higher than last week.
Last week's 10-year quality credit spread between BBB revenue bonds and AAA general obligation bonds was 0.86%, higher by 1 basis point for the week. The historical average credit spread is at 1.68%.
Investment grade spreads for the past week were at 114 basis points, 8 basis points lower than the previous week. The long-term average for investment grade is 1.56%.
Money Market Flows (millions of dollars)
Money market fund flows were mixed last week.
Mutual Fund Flows (millions of dollars)
Mutual fund flows were mixed last week.
ETF Fund Flows (millions of dollars)
Net ETF flows were negative except for municipal.
This is another big municipal new issuance week with more than $8 billion in tax-exempt calendar issuance. 2026 has seen a robust supply so far at $97 billion YTD.
The Iran conflict has injected genuine uncertainty into markets: oil above $110, a closed Strait of Hormuz, a Fed with limited room to maneuver, and a consumer facing rising prices and softening confidence. It is easy, in that environment, to retreat from risk and wait for clarity that may never arrive. But amid all of that noise, one signal remains clear and unambiguous: the 10-year Treasury is yielding 4.28% in a world where core PCE is running at 3.1%. That is 118 basis points of positive real yield, earned today, locked in today, with no geopolitical resolution required. The war may persist, inflation may stay sticky, and the Fed may hold longer than markets hope, and the real yield is positive through all of it. History is unambiguous on this point: when you can earn above inflation in the safest asset in the world, you own it, and you dollar cost average into it. Let time and compounding do the work. The uncertainty is real. The opportunity is equally real. 10-year Treasury: 4.28%. Core PCE: 3.1%. Real yield: +118bps. You are getting paid to own duration.
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