The Premium Comes Out
Risk assets priced relief through May. The rates market held out until the final week.
May 2026
Last month’s note argued the curve had confirmed the transmission — the oil shock moving cleanly into rates, credit, and policy — and left one question open: whether demand destruction would resolve the episode, or whether something else would intervene first. May answered both. Demand destruction was already underway; the IEA now sees global oil demand contracting in 20261. But a 60-day U.S.–Iran truce got there first, and it pulled the war premium out of risk assets. What it did not do — until the very last week — was pull it out of rates.
Relief didn’t arrive everywhere at once. Equities and credit took it through the month; the bond market priced the opposite almost to the close.
The Barrel Reverses
February’s shock and March’s confirmation both ran through crude; May ran the tape backward. Brent fell roughly 19% — its worst month since the pandemic — ending near $92.56, about 20% below its 2026 peak, after an April that averaged around $1202. The driver was the repricing of chokepoint risk: once the market assigned real odds to the Strait reopening, the premium built into freight, inventories, and inflation expectations drained out together. Two cautions. The unwind rests on a truce that spent the middle of the month looking shaky — the administration called one Iranian counteroffer “totally unacceptable” — and any reopening is likely partial. And the barrel is deflating the macro on the market’s timeline, not the data’s: the price relief is immediate; the inflation it already caused is not.
The Front End Held; the Long End Led
This is where the relief story breaks down. The 2-year did not blink. It opened May near 3.88%, climbed to 4.13% by the 19th, and eased only to 3.98% by the 29th — closing the month about 10 basis points above where it started, with the hike premium not just intact but firmer. It never returned toward the 3.50–3.75% funds target; it spent the entire month well above it3.
The defining move was at the long end, and it ran the wrong way for the relief narrative. The 10-year sold off from about 4.39% in early May to 4.67% by the 19th before easing — a bear steepening that pushed the 2s10s spread out to roughly 54 basis points at the peak. That run-up tracked exactly what should lift term premium and inflation compensation: April PCE at 3.8%, the ceasefire wobbling mid-month, crude still above $100, and Warsh’s confirmation hardening the higher-for-longer baseline. Only in the closing week did yields ease — the 10-year back to 4.45%, the 2-year to 3.98% by the 29th — as the truce firmed and crude collapsed. The premium came out of the long end at the very end, and never came out of the front end at all. A rally the bond market joins only in the last week is a rally on probation.
The Data Catches Up
That late, grudging move in rates fits what the data printed. Markets priced the cure in risk assets; the disease showed up in the numbers. April PCE came in at 3.8% year-over-year — a three-year high, nearly double target — while Q1 GDP was revised to a 1.6% pace4. That is the stagflationary mix March was pricing — sticky inflation, softening growth — now in the hard data, which is precisely why the long end backed up into mid-month while equities climbed.
Credit, like equities, took the optimistic side: the ICE BofA US High Yield OAS tightened back toward roughly 272 basis points from about 317 in March5, the demand-destruction tail receding with the ceasefire. The S&P 500 closed at a record 7,563.63 on May 28 and the VIX fell to its lowest since late January. Risk assets all-in on relief; rates, until the final week, all-in on the data.
A New Chair Inherits Both
January argued that markets price regime, not just rates, and that governance had joined the watch list. May made it the institution: Kevin Warsh was confirmed 54–45 on May 13 — the closest Fed-chair vote in modern history — and sworn in May 22, inheriting the divided committee April’s four dissents revealed and inflation still near 4%6. His arrival is part of why the long end backed up mid-month. The question now is whether a chair who favors higher-for-longer and balance-sheet restraint ratifies the relief risk assets have priced, or leans against it with PCE near 4%. His first meeting, June 16–17, carries fresh projections; the dot plot and the dissents around it will say more than the rate decision.
The Portfolio Problem
For three months the problem was that one driver — the barrel — pushed equities, duration, and credit the wrong way at once. May complicated it: the driver reversed for stocks and credit but not, until the last week, for rates. Through mid-month you could be right on the oil unwind and still lose money in duration, because the long end was selling off on the inflation print even as equities made record highs. That is the harder version of a correlation regime — not everything moving together, but the diversifier you’d reach for, duration, moving against you while the risk you’d hedge, equities, ran. Only in the final week did the bond market fall into line. The 60-day truce is the hinge: if it holds, rates ratify the riskasset relief; if it breaks, the mid-May setup returns — yields backing up on inflation while growth softens — now with a 3.8% print on the board and a new chair still establishing credibility.
The barrel drove the macro in February; the curve confirmed the transmission in March. In May the premium came out of risk assets fast, out of the long end late, and never out of the front end. Premiums unwind at the speed of headlines; inflation arrives at the speed of data — and this month the bond market sided with the data almost to the last bell. June’s first question belongs to the new chair: ratify the relief, or lean against it.
1IEA, Oil Market Report (May 2026)
3FRED, DGS2 & DGS10 (daily 2Y/10Y); U.S. Treasury Daily Par Yield Curve
4BEA Q1 GDP / April PCE; S&P 500 close (May 28, 2026)
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