Oil Price Surge Sparks Rate Hike Bets Amid Iran Tensions

The recent surge in oil prices due to escalating tensions over the Iran conflict has sent shockwaves through markets, prompting investors to bet on a Federal Reserve rate hike at its upcoming policy meeting.

US Treasury yields have surged as a result, with the 2-year yield reaching 4.37% on July 23, its highest level since early 2025. The 10-year benchmark also reached a year-to-date high of approximately 4.7%, indicating that market-implied odds for a Fed rate hike have increased significantly.

The Iran conflict represents an exogenous shock to the economy, with higher oil prices leading to supply-side inflation that is not driven by demand. This type of inflation is notoriously difficult for central banks to address through monetary policy, and the Fed's track record on handling such shocks is not encouraging.