by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our thoughts on the agreement to reopen the Strait of Hormuz, alongside signs that the conflict could spread deeper into the Middle East. We then focus on the Japanese yen and a possible return to currency intervention. Next, we review Alphabet’s recent debt issuance, the decline in US Strategic Petroleum Reserve levels, and the early front-runner to succeed President Trump as leader of the Republican Party. As always, we conclude with a roundup of recent domestic and international economic data.

Iran Demands: Despite ongoing negotiations, the conflict shows little sign of nearing an end. On Thursday, Iran and Oman unveiled details of an agreement permitting passage through the strait, though US and Israeli vessels remain explicitly barred. Meanwhile, Houthi forces have intensified their attacks on Saudi-backed troops in Yemen. These developments highlight the volatile, stop-and-start nature of the regional crisis as tensions over the waterway persist.

• Despite a pending transit agreement with Oman, Iran maintains that the Strait of Hormuz remains restricted. Under the proposed dual-channel arrangement, commercial vessels would enter via Iranian-monitored routes and exit through Omani-controlled waters. Although the framework currently operates without transit fees, Iran asserts its right to impose tolls in the future. US acceptance is unlikely, as Washington continues to reject any permanent impediments to free navigation.
• Moreover, fighting between Saudi Arabia and the Iranian-backed Houthis has begun to escalate. The surge in violence follows a major Houthi-led attack on Saudi-backed forces in Yemen, which resulted in hundreds of casualties. The Houthis claimed the strike was a response to what they described as a Saudi military buildup in its final stages. This marks the largest offensive outside the core confrontation between the US and Iran.
• Conflict in the Middle East continues to sit in a no-man’s-land, as signs of easing tensions are frequently followed by setbacks. The recent agreement between Iran and Oman may be another example of this trend: while it offers a welcome sign, it does not provide a final solution to the standoff over the Strait of Hormuz. Furthermore, the intensifying conflict in Yemen threatens to spark broader unrest throughout the region.
• At this time, we still expect ongoing geopolitical uncertainty in the Middle East to weigh on financial markets. Fortunately, resilient economic growth has helped prevent a prolonged downturn. We anticipate this underlying strength will persist, provided the regional conflict remains contained to a limited number of countries.

Another Yen Intervention: Nearly a week after the United States and Japan coordinated efforts to support the yen, the currency has already surrendered roughly half of its initial gains. The reversal reflects continued investor skepticism over whether the Bank of Japan can tighten policy sufficiently to contain inflation pressures stemming from recent energy-market volatility. The yen’s renewed weakness has revived speculation that US and Japanese authorities could take further coordinated action to prevent a deeper decline.

• The prospect of further coordinated intervention comes as Japan pursues additional stimulus to support growth. Earlier this week, the government approved a two-year reduction in the consumption tax on food to 1% from 8%, effective April 2027. The measure is central to Prime Minister Sanae Takaichi’s effort to ease cost-of-living pressures, but the resulting revenue loss has heightened concern over how the government will finance the shortfall given Japan’s already strained fiscal situation.
• While the Bank of Japan has signaled its intention to normalize policy as it unwinds years of ultra-accommodative monetary settings, it has continued to raise interest rates gradually. However, last week the central bank left its policy rate unchanged at 1%, despite signs that higher energy costs could add to inflationary pressures. Its cautious approach appears to reflect, in part, the Takaichi administration’s emphasis on weighing growth and financial conditions alongside inflation as the Bank considers further tightening.
• Japan’s pursuit of fiscal stimulus, combined with the BOJ’s gradual approach to monetary tightening, could leave FX intervention as a key tool for supporting the yen. However, if Tokyo were forced to fund large-scale intervention by selling its substantial Treasury holdings, this could put downward pressure on Treasury prices and push yields higher. In an extreme scenario, this could trigger a broader sell-off in global bonds, as other countries move to protect their own market liquidity.
• While Japan’s actions have triggered a global bond sell-off, we see this as a temporary, event-driven phenomenon rather than a long-term risk. The liquidity squeeze stems primarily from government funding needs tied to the Strait of Hormuz energy disruption. As soon as this geopolitical issue stabilizes — and we are optimistic it will — yen and bond-market pressures should subside. Therefore, we view any US coordination efforts as finite and conditional, not open-ended.

AI Debt: Alphabet is raising up to $25 billion through a new bond sale as it seeks to fund its expanding AI infrastructure. The Google parent company generated strong investor demand by offering attractive yields across multiple tranches. So far this year, hyperscale tech companies have issued historic levels of debt, with Alphabet joining peers like Amazon and Oracle in tapping global bond markets. This push to raise debt comes as major tech firms look to diversify their funding sources beyond cash reserves to secure the lowest possible cost of capital.

Crude Supplies Low: According to Bank of America, US Strategic Petroleum Reserves have fallen to their lowest level in 43 years. The sharp decline stems from the White House’s ongoing effort to curb oil prices, which has involved releasing over 172 million barrels over a 120-day period. This substantial drawdown raises questions about Washington’s ability and willingness to sustain its confrontational stance toward Iran, particularly with the midterm elections approaching.

Vance 2028? President Trump has reportedly urged private donors to support Vice President JD Vance in the upcoming presidential election. While other potential contenders — such as Secretary of State Marco Rubio — could vie for the nomination, Trump appears to favor Vance as his successor to lead the party. This effort to groom a standard-bearer comes as Republicans build a formidable advantage over their Democratic counterparts, strengthening their bid to retain the White House.

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