Oil prices surge but no longer push up interest rates. What is the market afraid of?

Since the Strait of Hormuz shut down on March 2, global oil flows of roughly 17.8 million barrels per day have been cut off. For the month of March alone, Brent is up by nearly 60% and WTI by about 53%. This is the steepest one-month gain for Brent since its inception in 1988, beating the 46% record set during the 1990 Gulf War.

All else being equal, a surge in oil prices should raise inflation expectations, and bond yields should move higher as well. For most of the past two decades, oil prices and 10-year Treasury yields have indeed been positively correlated. But this time, they’re moving in opposite directions.

In the first three weeks of March, they were still rising in sync. WTI climbed from $67 to $100, while the 10-year yield rose from 4.15% to 4.44%. The turning point came between March 27 and March 30: oil prices kept surging higher, but yields crashed from 4.44% to 3.92%, falling 52 basis points over three trading days and slipping below the psychologically important 4% level.

This is a typical “flight-to-safety” move, as the bond market makes a judgment: growth risks are now outweighing inflation risks. The plain wording from Oxford Economics, an economic research institution, is “economic growth risks begin to outweigh inflation risks.” In other words, the market isn’t that it fears inflation less—it fears a downturn more.

This kind of decoupling isn’t common, but whenever it appears, the story that follows isn’t a good one.

Over the past half-century, there have been five occasions when oil prices jumped by more than 35% in the short term. In 1973, the oil embargo caused the U.S. GDP to fall by 4.7% afterward. In 1979, the Iranian Revolution left global GDP growth deviating from trend by 3 percentage points. In 1990, the Gulf War pushed the U.S. into a brief recession. In 2008, oil prices topped out at $147—although the main driver of that recession was the financial crisis, the oil shock accelerated the economic downturn. The only exception was the oil spike driven by the Russia-Ukraine war in 2022: it didn’t trigger a recession, but the cost was the worst inflation in 40 years.

The rally in March 2026 exceeds all of the cases above. In research by Federal Reserve economist James Hamilton, there is no mechanical link between oil price shocks and recessions, but “the larger the net increase in oil prices, the more significant the drag on consumption and investment.” Goldman Sachs has raised the probability of a U.S. recession to 30%, while the figure provided by consulting firm EY-Parthenon is 40%.

The speed of the market’s reaction has also been unusually fast.

In early March, CME FedWatch showed the market pricing in three rate cuts for the year, with a 70% probability of a cut in June. Then oil kept climbing. On March 26, the U.S. import price index jumped 1.3%, and incoming Fed Vice Chair Kevin Warsh hinted that the neutral rate could be higher. On that day, the probability of adding hikes within the year surged to 52%, and the 10-year yield touched 4.35%. FinancialContent described the day as “The Great Hawkish Pivot.”

Four days later, the narrative flipped completely. On March 30, consumer confidence data fell sharply, and manufacturing unexpectedly contracted. The 10-year yield plunged to 3.92%. According to FinancialContent, the probability of bets on a dovish pivot by the Fed in May rose to 65%. Goldman Sachs said the market’s positioning on the direction of rate moves is wrong. That day, Powell told undergraduate students at Harvard that the Fed “isn’t at the point where it has to decide whether to look through the war’s shock,” but he emphasized that “anchoring inflation expectations is key.”

As reported by Axios, Powell’s remarks were interpreted by the market as: the Fed doesn’t want to raise rates to fight inflation, nor does it want to cut rates quickly to save the economy—it’s waiting, waiting to see whether this supply shock is temporary or persistent. But the bond market can’t wait anymore.

If history is any guide, Citigroup strategist McCormick put it most plainly: ahead lies stagflation—bad for bonds, and bad for stocks.

The Great Stagflation from 1973 to 1982 provides an asset-return scorecard. Gold’s real annualized return was +9.2%, the S&P GSCI commodities index rose 586% over ten years, and real estate returned +4.5%. Meanwhile, the real annualized return of the S&P 500 was -2%, and long-term Treasuries were -3%. According to historical data from NYU Stern, in 1979, long-term Treasuries lost as much as -8.6% in a single year.

Conventional 60/40 portfolios (60% stocks + 40% bonds) were crushed in stagflation. The only thing that can beat inflation is real assets. Société Générale forecasts an average Brent price of $125 in April, with a “credible peak” up to $150. Goldman Sachs is a bit more moderate, expecting an average of $115 for April, but assuming the Strait of Hormuz restores shipping within six weeks, it expects the price to fall back to $80 by year-end.

The bond market has already made a choice for everyone: between inflation and recession, it is betting on recession.