by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with thoughts on the rise in attacks on ships traveling through the Strait of Hormuz and the possibility of a broader conflict. Next, we examine growing speculation that the Treasury may reduce issuance of 20-year bonds and what that could mean for yields. We then discuss concerns about a possible plague outbreak in Russia and signs of escalating trade tensions between the EU and China. As always, we conclude with a review of recent domestic and international economic data.

Iran Troubles: Although oil flows through the Strait of Hormuz have increased, shipping risks remain elevated. Reports on Tuesday indicated that Iran had stepped up attacks on vessels transiting the strait. The escalation comes as Tehran and Washington appear no closer to an agreement and the conflict shows signs of widening. Continued attacks are likely to deepen concerns about disruptions at this critical supply-chain chokepoint as the conflict drags on.

• UK Maritime Trade Operations has reported nine attacks in the Strait of Hormuz so far this month — half of the total for the entire month of September. This escalation appears designed to deter maritime traffic following a surge in regional energy exports. In September, Gulf oil producers surpassed pre-war shipment levels for at least half the month. The uptick in transit spanned several key export routes, including Hormuz, the Red Sea, and pipeline terminals.
• Iran’s escalating attacks on commercial shipping may be a calculated effort to maintain leverage during ongoing nuclear negotiations with the White House. Vice President JD Vance, a primary representative in the talks, has maintained that any deal to end hostilities and reopen the Strait of Hormuz must include a concrete agreement by Tehran to reduce its uranium enrichment capacity. Vance also noted that Washington faces additional complexity due to an opaque decision-making apparatus in Tehran.
• As talks between Washington and Tehran continue, fighting elsewhere in the Middle East is intensifying. Overnight, the Houthis reportedly attacked Aden International Airport amid a Saudi-backed counteroffensive to retake territory near the Bab el-Mandeb Strait. Saudi Arabia is supporting allied Yemeni government forces, marking renewed hostilities between Riyadh and the Houthis.
• So far, markets have focused on the conflict’s impact on oil prices, paying less attention to the shift in price momentum. Although crude remains above pre-conflict levels, it has stopped making new highs and is trading within a relatively narrow range. This loss of upward price pressure suggests the initial price shock may be fading even if the worst of the conflict isn’t over. That could support the wider markets as investors reassess the risks.

Long-Bond Jitters: Investors are weighing potential Treasury interventions ahead of next month’s quarterly refunding announcement. BNP Paribas warned Tuesday against trimming 20-year bond supply, cautioning that the move could backfire. The note follows comments in which Treasury Secretary Scott Bessent signaled active management, telling Axios that while he “may not win every hand,” he will “win over time.” Speculation surrounding intervention continues to hang over the bond market.

• A new report from BNP Paribas warns that reducing or eliminating 20-year Treasury bond issuance could be perceived as a panic move. The firm cautions that, rather than driving yields sustainably lower, the strategy could backfire, leading to higher yields and reduced liquidity. BNP Paribas also recommended taking a short position on 30-year Treasurys, setting a yield target of 5.80%, up from the current 5.66%.
• BNP Paribas’s warning comes as Bessent maintains that the market is overreacting and pushing bond prices below their equilibrium value. Last month, the Treasury attempted to improve liquidity by announcing a larger-than-expected buyback of long-duration bonds. However, bond yields rose following the announcement as fresh concerns over the conflict in Iran combined with market skepticism regarding Treasury intervention to spark a renewed sell-off.
• The White House maintains that economic growth will be sufficient to rein in the national debt. While markets remain skeptical, this strategy has historical precedent. A Brookings Institution study noted that the dot-com boom of the late 1990s drove nearly 60% of that decade’s deficit reduction. With third-quarter GDP projected to expand at an annualized rate of 5%, a sustained AI boom could produce a similar fiscal windfall.
• Trimming 20-year issuance would be a concerted effort to lower yields and trim borrowing costs, but its impact will probably be short-lived. While it should lift demand for other maturities along the curve, it leaves the root cause unaddressed: a persistent oversupply of government debt. If the Treasury’s tools fall short, the White House may have to seek fiscal remedies to contain yields — either spending cuts or tax increases — though the latter looks unlikely unless Democrats gain control of both chambers of Congress following the midterm elections.

Russian Plague: Concerns are growing regarding a potential pneumonic plague outbreak in Russia. While authorities have confirmed only a single fatality to date, government officials are keeping a close watch on the situation. On Tuesday, President Trump announced he would speak with Russian President Vladimir Putin about the matter. Though the overall risk that the plague will spread remains low, apprehension lingers that the disease could lead to another pandemic.

China-EU: Trade tensions between the EU and China have begun to escalate. On Wednesday, Beijing warned that it has tools to retaliate if the bloc moves to limit trade. The warning follows a push by France and Germany to curb Chinese imports into the EU, potentially including blocking goods that benefit from unfair government subsidies. The escalation is another example of countries moving away from globalization as they look to shore up domestic industries.

View PDF