Oil prices
Oil prices have been elevated since the start of this conflict, but so far the White House has been able to keep WTI mostly below $100. However, the longer this conflict goes on, the greater the risk of things getting worse with oil prices, which would mean higher inflation becomes embedded in the 2026 inflation outlook.
Now, some people would argue that this type of inflation hits Americans’ pocketbooks and will create a recession. However, since 2010, we have had high oil prices and an expanding economy, which means bond yields can remain elevated because the impact on the economy may take time to materialize. Don’t count on higher oil prices to bring the U.S. into a recession anytime soon — it needs to stay higher for longer.
10-year yield
Since September of 2025, the 10-year yield has been in a low range between 4.30% and 4%.
As I am writing this Friday morning, the 10-year yield is at 4.38% and market traders are now pricing in a probability of a rate hike later in the year. Not only do we have higher oil and gas prices, but rates are heading higher with no rate cuts priced in for 2026.
My peak forecast for the 10-year yield this year was 4.60%, but that was based on the assumption that the labor market was improving and there was no real progress on inflation. Now, due to the escalation of the conflict, the high end of the mortgage rate forecast is easily in play at 6.50%-6.75%.
Conclusion
At the beginning of this conflict, I said if it continued past March 21 I would need to reassess the economic outlook, as the impacts would be more painful the longer it goes, with higher rates and higher oil prices. Now, the concern is the conflict escalates into something worse, rather than ending soon.
Before this conflict, the housing market was gliding toward its first real growth year in existing home sales in years, mostly because rates were stable and under 6.25% throughout the year. Now we are on the verge of breaking even higher with more volatility.
