Duration Dashboard

The April CPI print of 3.8% year-over-year, released Monday May 12, was the primary catalyst for this week's rate moves. Energy CPI rose 17.9% year-over-year — the sharpest reading since September 2022 — reflecting the prolonged Strait of Hormuz disruption now entering its third month. Gasoline CPI contributed approximately 40% of the headline acceleration at +28.4% year-over-year. The following day's PPI release reinforced the pipeline pressure, with headline PPI at 6.0% year-over-year — its highest level since December 2022 — and a monthly PPI energy component of +7.8%, including diesel at +12.6% and gasoline at +15.6%. Together, these two data points removed what remained of the market's near-term rate-cut pricing. As noted in our May 10 report on the Treasury Quarterly Refunding, stagflation risks had been building in the data; this week's releases confirmed that concern.

Credit Pulse

Credit markets delivered a notably divergent result from the rates selloff. Investment grade OAS tightened 4 basis points to 71 basis points — moving deeper into the 8th percentile of the five-year range, an extremely low historical reading — while high yield spreads were essentially unchanged at 258 basis points (13th percentile). The VIX settled at 18.43, in the middle of its historical range, suggesting equity volatility expectations did not reflect the degree of stress visible in Treasury markets. The primary issuance calendar was largely closed during the most risk-sensitive sessions around the CPI and PPI releases, though the broader IG market saw limited concession pressure.

The durability of spread compression alongside a 24-basis-point increase in the 10-year yield is consistent with a market interpreting this as an energy supply shock rather than a deteriorating growth or credit cycle impulse. A Hormuz-driven oil price increase, by itself, does not impair the revenue-generating capacity of most investment grade issuers in the near term; it does, however, raise input costs and can compress margins for energy-intensive sectors. The more consequential dynamic would be a demand destruction scenario where elevated energy prices materially slow GDP — a scenario credit markets are not currently pricing, but one worth monitoring if Brent crude remains above $100 per barrel through summer.

Federal Reserve Policy Outlook – The Warsh Era Begins

The incoming Chair inherits a policy environment defined by competing constraints. Headline CPI at 3.8% — well above the 2% target — would ordinarily argue for a tightening bias or, at minimum, an extended hold. However, the primary driver of that inflation is a supply disruption (the Hormuz closure) rather than excess domestic demand, complicating a straightforward hawkish response. Tightening into a supply shock risks amplifying the growth deceleration by compressing demand without addressing the underlying supply-side cause. By week's end, CME FedWatch pricing indicated approximately 50% probability of at least one rate increase in 2026 — a substantial shift from the rate-hold consensus that prevailed entering the week.

Warsh's stated preference for transparency and clear communication will be tested immediately. Markets will scrutinize his first public remarks — expected in the week ahead — for signals on whether he views the current inflation episode as temporary (supply shock that will resolve with Hormuz reopening) or structural (a regime change requiring tighter policy). The language he chooses around the Hormuz disruption will be consequential for the intermediate and long ends of the curve, which have moved into extreme historical percentile territory and are sensitive to any signal about the Fed's reaction function.

Week Ahead: May 18–22, 2026

• Warsh's expected first public remarks as Fed Chair (week of May 18): Markets will parse any public appearance by the new Chair for initial signals on his assessment of the inflation trajectory and the Hormuz disruption's monetary policy implications. Any characterization of the supply shock as "transitory" would likely compress intermediate yields; a more hawkish framing would add to existing rate pressure.
• Housing starts and building permits (May 20): Residential construction data will reflect the combined headwinds of mortgage rates above 7% and rising materials costs from energy pass-through. Permits data will indicate whether builders are adjusting capital spending plans in response to the rate environment.
• Flash PMI data (May 21): The first May reading on manufacturing and services conditions will provide an early indication of whether the inflation data and rate move are beginning to weigh on business activity. Services PMI is particularly important given its sensitivity to consumer spending patterns.
• Treasury 2-year and 5-year note auctions (week of May 18): Demand metrics — particularly bid-to-cover ratios and indirect bidder participation — will be closely watched given the soft reception of last week's 10-year and 30-year auctions. The 5-year tenor, which registered the largest weekly yield increase at +26 basis points, may attract value-buyers at current levels.
• Iran/Hormuz diplomatic developments: The Strait of Hormuz remains the single largest driver of both inflation and risk sentiment in fixed income markets. Any credible progress toward a ceasefire or agreement to reopen commercial shipping would represent a substantial positive catalyst for duration. JPMorgan's warning that OECD oil inventories could reach stressed levels by early June adds urgency to the diplomatic timeline.

US Economic Positioning and Global Context

The United States is not navigating this inflation episode in isolation. The Strait of Hormuz disruption represents, according to the International Energy Agency, the largest supply disruption in the history of the global oil market — a characterization that reflects the 20% share of global oil supplies and significant LNG volumes that transited the Strait before its effective closure in early March. The global dimension of this shock means that other developed-market central banks face versions of the same dilemma confronting the incoming Fed Chair: inflation driven by a geopolitically sourced supply constraint that monetary policy cannot resolve through conventional demand management.

The dollar's position relative to this dynamic has been notable. DXY ended the week near 99.27, modestly firmer on the week as the US rate re-pricing widened the interest rate differential with the ECB (holding at 2.00%) and other developed-market peers. Dollar strength provides a partial offset to imported energy costs, though its magnitude has been insufficient to meaningfully dampen the headline CPI impact of $100+ crude oil. For foreign holders of US Treasuries — who represent a substantial share of the demand base — the combination of higher yields and a stronger dollar presents a more favorable entry point than at any time in recent years, though the brief April Hormuz reopening and subsequent re-closure demonstrated how quickly the geopolitical backdrop can shift.

The synchronized global bond selloff — US 10-year at the 96th percentile, Japan's 30-year JGB at record levels, UK gilts at 2008 highs — suggests the repricing of term premium is not a US-specific phenomenon. The reversal of ultra-accommodative global monetary policy, which began in 2022 and was interrupted by a disinflationary interlude in 2024–early 2026, appears to be entering a new phase driven by the Hormuz supply shock. For institutional fixed income allocators, this argues for caution on wholesale duration extension at current levels, pending greater clarity on both the Hormuz timeline and the new Fed Chair's initial policy signals.