US-Iran tensions have escalated over the past week. Both sides have launched missile and drone attacks across the Gulf region. Iran claims to have closed the Strait of Hormuz—which is vital for global oil shipments—while the US has responded with strikes on Iranian military targets and has maintained naval escorts for commercial vessels. These developments cast doubt on a recent interim agreement to reopen the strait and end hostilities. Jitters in the energy and financial markets have risen.
Global bond yields rose to their highest levels in a month on 9 July, as renewed strikes pushed up oil prices and minutes from the Federal Reserve’s June meeting revealed persistent inflation concerns in the US. At the time of writing on 14 July, the 10-year US Treasury yield traded near 4.57%, while the 10-year German Bund yield stood stood at 3.09%, close to levels last sent in May. Meanwhile, Brent crude oil prices rose to USD 85.50/bbl, though they remain well below the USD 120/bbl peak seen earlier in the conflict.
Will oil prices and bond yields spike?
Despite the renewed conflict, CIO believes oil prices and bond yields are unlikely to revisit the extreme levels seen earlier during the war. Both the US and Iran have strong incentives to avoid a return to all-out war, and while shipping confidence and production recovery will take time, we think the market is overestimating the speed at which energy supply will normalize. CIO expects Brent crude oil to end the year at USD 85/bbl—well below the wartime peak. The pass-through to core inflation should be limited, as preliminary data shows Eurozone inflation cooled in June, and similar disinflationary patterns are evident in the US.
Central banks, including the Federal Reserve and European Central Bank (ECB), have acknowledged easing inflation pressures and remain cautious about further rate hikes. While market pricing of central bank policies remains biased toward further rate hikes in 2026, CIO thinks this is too hawkish, as policymaker rhetoric looks set to soften as confidence grows that second-round inflation effects are limited. We expect the ECB to pause after one additional hike (most likely in September), and believe the Fed will hold current policy settings until it cuts rates in early 2027. As a result, we believe the justification for elevated yields is less clear.
Bonds may still offer value
Yield volatility may persist in the near term, but CIO views the recent sell-off in global bond markets as an opportunity to lock in attractive yields. With stocks outperforming bonds this year and yields at elevated levels, investors can consider revisiting high-quality bonds as both a portfolio diversifier and a source of returns. CIO favors short- to intermediate-maturity quality bonds denominated in US dollars and British pounds, and sees value in select European bonds with longer maturities. In Eurozone government bonds, CIO has higher conviction in extending into longer maturities, as the ECB’s recent rate hike is expected to cap longer-dated yields, especially given the soft economic backdrop and limited inflation risks.
Can commodities rally again?
While broad gauges of commodity prices are trading roughly 8% lower than their wartime peaks in May (Bloomberg Commodity Index), we believe the rationale for owning them remains intact. Broad commodities are still sitting on year-to-date gains, and the asset class continues to offer portfolio diversification, potential portfolio insulation against persistent inflation, and exposure to structural demand trends that include AI and electrification.
We note that oil markets have absorbed recent disruptions better than expected, thanks to reserve releases and subdued demand from China, but inventories remain thin, leaving the market vulnerable to renewed escalation. Gold is supported by central bank demand and reserve diversification, while AI infrastructure, electrification, and weather-related risks underpin the outlook for industrial metals and selected agricultural commodities.
We see value in a broad, actively managed commodity allocation. Commodities have historically shown low correlations with equities and bonds, making them a useful portfolio diversifier—especially when stock and bond returns move in lockstep. Investors can access commodities through a variety of different vehicles.
For investors with substantial allocations to gold—the price of which remains well below its January peak as a result of firmer after-inflation yields, a stronger USD, and less dovish Fed expectations—broadening exposure to include copper, aluminum, and agricultural assets may help diversify sources of future return.
