100 Days of Conflict: Oil, Inflation and Rates

June 8 marked 100 days since hostilities began between the United States, Israel, Iran and Iranian-backed proxies across the Middle East. While the 100-day milestone has little significance on its own, it provides a useful opportunity to assess how the conflict has affected financial markets and the global economy.

As with many conflicts in the Middle East, the story begins with oil. Energy markets reacted almost immediately after traffic through the Strait of Hormuz—a critical artery for global energy shipments—was disrupted by military operations in the region. Although prices fluctuated in response to developments in Washington and Tehran, the overall trend has been decidedly upward. One hundred days into the conflict, Brent crude prices remain roughly 56.5% higher than at the start of the year. This price surge has reverberated throughout the global economy, raising transportation and manufacturing costs while adding renewed inflationary pressure in many countries.

Oil Prices Climb Sharply Since February 28

Source: Bloomberg; data as of June 8, 2026.

The sharp increase in oil prices has directly impacted inflation levels globally. Concerns about the impact of tariffs following Liberation Day 2025 kept inflation well above the Federal Reserve's 2% target. However, as 2026 began, there were signs of improvement, with headline Consumer Price Index (CPI) slowing to 2.4% and core CPI easing to 2.5%. That progress proved temporary as higher energy prices began filtering through the broader economy. The most recent data for May showed headline CPI rising to 4.2% and core CPI to 2.9%, both higher than April numbers. The energy index increased 3.9% in May, following gains of 3.8% in April and 10.9% in March, and accounted for more than 60% of the monthly increase in headline inflation. Other categories also contributed to price pressures. Shelter costs rose 0.3% in May, while the food index increased 0.2%. Within food, prices for food in the US rose 0.1%, while food away from home increased 0.3%. Controlling inflation remains one of the Federal Reserve's primary objectives, alongside its mandate to promote maximum employment.

Headline and Core CPI

Source: Bloomberg and Bureau of Labor Statistics; data as of May 31, 2026.

With inflation showing renewed signs of pressure, attention shifts to the labor market, which has seen a strong resurgence in job creation over the past three months. The labor market spent late 2025 and early 2026 alternating between modest job gains and losses; more recently, however, employment growth has regained momentum as the past three non-farm payroll reports showed an average monthly gain of approximately 188,000 jobs. At the same time, the unemployment rate has remained stable, fluctuating between 4.1% and 4.5% over the past year and averaging 4.3%, suggesting that labor market conditions remain broadly resilient despite elevated energy prices and geopolitical uncertainty.

Labor Market Shifts

Source: Bloomberg and Bureau of Labor Statistics; data as of May 31, 2026.

Rising prices and a resilient labor market may have pushed the Federal Reserve to reassess the future path of rates. While the administration has called for lower interest rates, newly appointed Federal Reserve Chairman Kevin Warsh faces an early test of leadership as he balances political pressure with the Federal Reserve's long-standing independence. Few observers expect policy action at his first official meeting as Chair on June 17, but investors will closely scrutinize the post-meeting statement and subsequent press conference for clues about the path of monetary policy through year-end. Market expectations have shifted materially in recent months, moving from pricing in two rate cuts by year-end to increasingly pricing in the possibility of at least one rate hike as inflation pressures persist and labor-market conditions remain resilient.

Shift in Market Outlook for Fed Action

Source: Bloomberg; data as of June 8, 2026.

Markets have also reflected expectations for rate hikes via movement in the Treasury market. The two-year Treasury is among the most interest-rate-sensitive segments of the Treasury market, and its yield movements over the past three months have reflected evolving expectations for Federal Reserve policy. Higher energy prices, which contributed to inflationary pressures, combined with continued labor market strength, led investors to anticipate a more hawkish Fed. This view was reinforced by the minutes from the Fed’s most recent meeting, which revealed that three participants favored a more hawkish policy stance than was ultimately reflected in the committee's statement. Following the conflict’s onset on February 28, the two-year Treasury yield rose steadily, with particularly sharp moves after stronger-than-expected labor market reports and major geopolitical developments—including a 10.4 basis point increase on June 5 after May’s payrolls rose 172,000, substantially above expectations of 88,000.

2-Year Treasury Yield

Source: FRED; data as of June 8, 2026.

Although yields increased across the Treasury curve, the magnitude of those moves varied by maturity, with the securitized and corporate sectors primarily experiencing spread tightening. Residential mortgage-backed securities (RMBS) were the only sector whose spreads to comparable-duration Treasury securities ended June 8 wider than where they began the year. Spreads initially tightened sharply on January 8 after the administration directed the Federal Housing Finance Agency (FHFA) to begin purchasing residential mortgage pools through Fannie Mae and Freddie Mac. Agency mortgage spreads, which had been trading in the low-to-mid-20 basis-point range, compressed to approximately 14.1 basis points the following day. However, as investors concluded the program's impact would be limited, the sector gradually reversed course. Beginning in early March, RMBS spreads generally widened alongside rising Treasury yields, interrupted only by several brief periods of tightening.

Asset-backed securities (ABS) and non-agency commercial mortgage-backed securities (CMBS) exhibited similar performance patterns, diverging from RMBS. Spread levels in both sectors tightened steadily through the end of February before widening as the conflict intensified. From mid-April through early June, spreads resumed their tightening trend as investors sought incremental spread income offered by these sectors.

Corporate bonds experienced a more volatile trajectory during the conflict's first 100 days, ultimately ending with spreads slightly below their level at the start of the year. The Bloomberg US Corporate Index spread began the year at 77.4 basis points and widened to a peak of 92.7 basis points, its highest level since the market volatility following Liberation Day in April 2025. In March, April and May, corporate spreads steadily retraced that widening, declining to 72.6 bps by June 8—nearly 5 basis points tighter than at the start of 2026.

For managers focused on bottom-up security selection rather than broad macroeconomic forecasts, the spread volatility experienced during the conflict's first 100 days created opportunities to selectively add attractively valued securities and strengthen long-term portfolio positioning.

Mortgage Spreads Higher Since Beginning of Year

Source: Bloomberg; data as of June 8, 2026.

ABS Spreads Push Higher, Then Contract

Source: Bloomberg; data as of June 8, 2026.

Non-Agency CMBS: Slight Uptick Interrupted Ongoing Tightening

Source: Bloomberg; data as of June 8, 2026.

Corporate Spreads Have Fluctuated in 2026

Source: Bloomberg; data as of June 8, 2026.