AFS Markets Blog: Midday 11/09/2026

• Meanwhile in markets, President Trump better TACO soon or we can sing the requiem for his Presidency. With energy prices soaring, the bond market has voted with its feet, making Treasury Secretary Bessent and his “I am the house” bravado look like a fool;
• On Monday I said that the path towards lower yields is paved with higher yields and higher energy prices. Well, I got the first part – that energy prices and yields will rise first – right. For yields and energy prices to subsequently fall, the market must force Trump’s hand. Cut a deal with Iran, then energy prices will fall, driving bond yields lower. No surprise here;
• The pressure on Trump to strike a deal with Iran before the midterms in November must already be enormous. According to the Wall Street Journal, Vice President Vance and Secretary of State Rubio, his heirs apparent, have both warned him that the war will likely last beyond his term. They think – and I think they’re right – that Tehran will simply endure the economic pain from the US blockade. The President was subsequently forced to say on the record that the war won’t last beyond the end of his term. In any case, his most senior cabinet members are warning him that if doesn’t cut a deal with Tehran or somehow finds the elusive magic formula to beat it into submission, it’s game over. The war will preoccupy the rest of his term while Democrat control of the House after the midterms makes him the proverbial lame duck;
• About that magic formula to beat Iran, the problem with the US economic and naval blockade is that it might be too successful. The Iranian economy is in freefall indeed. But what’s the downside for Tehran when it retaliates harder while the US squeezes the last bit of life out of Iran’s economy?  We see exactly that happening: Iran “raising the stakes” as Trump would quip. More importantly, naval blockades throughout history – think of the allied blockades of Germany in the World Wars, Japan in the Second World War, or the British blockade of Napoleon’s French Empire – have never been decisive for strategic victory. In each case, blockades were part of a broader strategy to defeat the other side on the battlefield. In the case of Trump, there seems to be no appetite to launch a real war or even start another bombing campaign;
• With Trump indecisive, the Gulf States are hedging their bets. According to the Financial Times, Gulf state officials while meet their Iranian counterparts in Oman on Monday to discuss reopening the Strait of Hormuz (which, if true, would disprove US claims that ship transits are rising). In this regard, I take due note of the (almost complete) absence of Iranian missile and drone strikes on the Gulf states. Perhaps Gulf officials and their Iranian counterparts can agree on an understanding to allow some shipping to resume. However, as part of a deal, Tehran will likely demand the US naval blockade ends and that it – not Washington – controls transits. In any case, that turns the onus on Trump to cede;
• At the same time, Iran’s proxies in Yemen, the Houthis have simply rolled Saudi-backed pro-government forces along the Red Sea coast and now control the strategic Bal al-Mandeb Strait, potentially choking off Saudi Arabia’s maritime crude exports. According to Axios, the Saudi Crown Prince Mohammed Bin-Salman unsuccessfully pleaded with Trump for air strikes on Houthi targets. Did Trump lose his nerve? Regardless, the Iranian’s must be gloating;
• And if that wasn’t enough, the International Atomic Energy Agency warned yesterday that activity has resumed at the Pickaxe Mountain fortified site were Iran is supposedly carrying out nuclear activity. Trump has boasted on several occasions that he would bomb the site. Now his chance;
• I’ve been consistently wrong that Trump’s self-preservation will kick in and that he will extract himself from his “short-term excursion” in Iran time before the midterms. Given the way things are going, now’s a good a time as any to call it a day. But I am no longer so sure he will;
• Turning to some market commentary, ahead of this afternoon’s crucial US CPI release US Treasury yields are off the highs while European equities and US equity futures are off the lows.  Weekly changes in bond yields and equity prices speak volumes. UST yields are up 12-19bps across a bear-flattening the curve. Bund yields are up 9-25bps across a bear-flattening curve after ECB President Lagarde greenlighted punters pricing in a more hawkish rate hike path;
• 10y and 30y UST and Bund yields are at their highest level in years, if not decades, making a mockery of Treasury Secretary Bessent’s intervention and ad-libbed jawboning. The pain is real as 10 year real yields have also reached their highest level in – in this case – decades (the 30y UST is almost there). And speaking of Bessent, his other obsession – the yen – is still more than a percent higher for the week against the Greenback. And at 154.1, only a point above its low;
• At $104 a barrel Brent crude futures are down more than three percent for the day but up eight percent for the week. Dutch natgas futures have fallen a percent and a half to 80.8 euros per MWh, which still represents a weekly gain of more than twelve percent;
• In this morning’ s cacophony of ECB-speak I detected no pushback against ESTR forwards blasting higher – the 1y1m jumped 35bps to 3.23. A violent move if any;
• Looking ahead, all eyes will be on the US CPI release at 14:30 CET. Consensus expects core to ease to 2.4% from 2.5% YoY and to 0.2% from 0.3% MoM. It should be irrelevant if CPI prints hot or cold. The Fed’s official PCE price index is tracking at almost four percent on headline inflation and 3.3-3.4 percent on core according to the Atlanta Fed nowcast. With Trump dangling $5,000 ‘dividends’ for Americans, Chairman Warsh should grow a spine. And hike at the FOMC meeting on Wednesday next week.

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