No deal (again)

The Iranian conflict took another turn yesterday. When both parties were allegedly going to reach an agreement, the US conducted strikes it called defensive; Iran called them a breach. Neither side has fully abandoned the truce framework as of the latest reports, but it’s under heavy strain. Which begs the question if the true motives of the conflict have changed for the US. Perhaps what started as a rapid conflict to seize a big oil producer and provoke a regime change, is now being extended deliberately, maybe because the extended conflict creates more pain for the region, aside from Iran, that will need the U.S. help even more desperately than before. We will only know if this is true with hindsight, but the signs are there. The pain for the U.S. is economic, and it shows in the bond market. The chart below shows the 2 year bond has gone 50 bps above Fed funds. That’s not normal. In fact the 2 year bond remains the best indicator of where fed funds will be, and right now it indicates rate hikes, which is the opposite of what the president wants and what the new Fed chair seems to indicate. The U.S. needs the world to keep buying U.S. treasuries, but it’s running out of reasons to make them a good deal. Is that the goal in the Middle East? Is that enough?

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