Lower Oil Prices Do Not Guarantee Lower Rates

Since the onset of the Iran conflict, 10-year government bond yields in both the United States and Canada have risen by more than 50 basis points. The simple explanation has been logical: geopolitical tension in the Middle East, oil supply disruption, and inflation as the obvious consequence. It is a plausible sequence. But it is also incomplete, and for advisors managing fixed income allocations, we believe several other factors need to be considered beyond just oil prices.

The Hormuz Thesis Has a Flaw

If energy were the singular force behind this yield move, then the reopening of the Strait of Hormuz would, in theory, be sufficient to bring rates back down. That logic is worth examining carefully before accepting it. The current rate environment is being shaped by a broader set of forces, several of which may show no sign of reversing simply because crude prices ease. Advisors who anchor their fixed income outlook to the oil story alone may be underestimating what is actually driving duration risk today.

Multiple Drivers Pushing Yields Higher

Growth has remained resilient. Earnings estimates, capital expenditure plans, gross domestic product forecasts, and consumer spending data are all holding in well across North America. Labour markets have followed suit: jobless claims, non-farm payrolls, and unemployment rates have remained stable, giving central banks limited justification to pivot aggressively toward rate cuts. Consumer Price Index and Producer Price Index readings have both been coming in above expectations, and these inflationary readings are not just driven by energy as supercore services inflation has increased from 2.7% to 3.4% so far in 2026. We’re also seeing broad-based commodity price pressure across copper, zinc, wheat, beef to name a few.
Another key driver of higher yields is the deteriorating fiscal position. Reduced tariff revenues, rising defense budgets, and the prospect of energy subsidies in key regions are compounding pressure on government balance sheets. Also, political dynamics in the United Kingdom and Japan, both significant bond markets, have pushed yields higher in those countries by even more than in North America in recent months, giving international bond investors more options besides owning U.S. Treasuries. We also believe that policy uncertainty is contributing to a growing term premium meaning that yield curves are getting steeper as investors demand more compensation to lend money to governments for longer periods of time.

^{Source: Bloomberg Inc. from Dec 2019 to April 2026}

^{Source: Bloomberg Inc. from Feb 27, 2025 to May 19, 2026}

Why This Distinction Matters for Fixed Income

The temptation to position for a sharp rate reversal once geopolitical tensions ease is understandable. But the convergence of strong growth, deteriorating fiscal outlooks, sticky and broad-based inflation, and elevated political uncertainty suggests this rate environment may prove more durable than the oil narrative implies. For advisors constructing fixed income portfolios, the distinction matters. Duration positioning, credit quality, and curve exposure all look different depending on whether one views elevated yields as a temporary geopolitical premium or as something with more structural roots. We believe it is increasingly the latter, and we think this has significant implications for how fixed income risk is being managed today.

All data sourced from Picton Mahoney Asset Management Research and Bloomberg Inc., unless otherwise cited.