As of today’s close:
Figure 1: Odds of Strait of Hormuz reopening by July 1, % (black, left scale); five year Treasury-TIPS spread, % (red, right scale), and DKW estimated five year expected inflation rate, % (pink, right scale). Source: Kalshi, Treasury via FRED, Federal Reserve Board, and author’s calculations.
The most likely game change in the Persian Gulf in the near term would come from China. The war-criminal-in-chief will not accede to anything which puts him in a bad light, so we won’t be treated to an announcement that China has engineered a re-opening of Hormuz – not this week.
But China wants Hormuz open and the war criminal wants a way out and wants things from China; a transaction is possible. Problem is, the war criminal is also a common criminal, a con man, who wants always to leave somebody else holding the bag. Xi is unlikely to accept such a deal. And the war criminal did poke the dragon with new trade restrictions just before boarding the plane, so allowing the war criminal to save face won’t be high on Xi’s agenda. Opening Hormuz will be.
My guess is, China will work for a solution, just as Pakistan has worked for a solution, because a solution is in China’s interest. Work of this sort requires time, effort, focus, attention to detail; China’s leadership has the capacity for this work. Our leadership does not. China has the clout to get things done and the trust of Iran’s leaders. Not right away, because right away is a childish hope, but as soon as can be.
In the scenario I have in mind, China settles a beef between to tin-pot dictators because they’re screwing things up for the rest of the world. Until recently, that was our job.
Yesterday the Treasury’s 30-year bond auction had a yield over 5%, the first time since 2007.
The bond vigilantes are getting restless.