Surging Oil Prices and Treasury Yields Raise Alarm Over U.S. Recession Risk

There has been a warning that the Iran war could plunge the U.S. economy into a deep recession. Rising energy prices, higher borrowing costs, and a sluggish stock market are increasing the burden on both businesses and consumers, fueling concerns about an economic downturn.

According to Bloomberg News on March 29 (local time), economists have recently revised down their U.S. growth forecasts and raised the probability of a recession. The rapid surge in energy prices is intensifying inflationary pressures, which, in turn, could lead to declines in consumption and investment.

Recently, Goldman Sachs estimated the probability of an economic downturn within the next 12 months at about 30%. PIMCO projected the probability to be over one-third. Bloomberg reported that the rise in energy prices due to the Iran war is amplifying concerns about an economic slowdown.

The Iran war has kept international oil prices on an upward trend. In particular, as the Iran-backed Houthi militia in Yemen launched missiles toward Israel, the May futures price for Brent crude exceeded $115 per barrel at one point. Concerns that the Middle East conflict could spread to the Red Sea have heightened upward pressure on international oil prices. The burden of rising oil prices has already been passed on to consumers. Gasoline prices have climbed to their highest levels since the COVID-19 pandemic. The Organisation for Economic Co-operation and Development (OECD) recently warned that U.S. consumer prices could rise by 4.2% this year.

Tariff policies, high interest rates, and a weak stock market had already been weighing on the U.S. economy even before the Iran war, and these factors are cited as accelerating the risk of recession. For example, employment indicators had been disappointing prior to the conflict. In February, nonfarm payroll jobs, including those in government agencies, decreased by 92,000. For March, employment is expected to increase by only 60,000. In addition, concerns surrounding artificial intelligence (AI) and warning signs in various parts of the private lending industry are also contributing to greater market volatility.

These ripple effects are also impacting the bond market. Typically, economic pessimism acts favorably for bonds: the Federal Reserve's interest rate cuts to support the economy tend to boost existing bond prices and bring down Treasury yields, which reflect market interest rates. However, this time, the situation is different. Investors believe the Fed is unlikely to cut rates easily. With inflation already exceeding target levels and energy prices surging, there is little room for the Fed to move rates prematurely.

As a result, Treasury yields have risen sharply in recent days. Since the U.S. launched airstrikes at the end of last month, yields on 2-year and 5-year U.S. Treasury bonds have climbed by more than 0.5 percentage points. The 30-year yield has also neared the 5% mark. Bloomberg analyzed that this reflects concerns that high energy prices will lead to increases in other commodity prices. Daniel Ivascyn, Chief Investment Officer (CIO) at PIMCO, said, "What started as an inflation shock could quickly turn into a growth shock," adding, "We are facing a serious risk of a significant weakening of the economy."

This content was produced with the assistance of AI translation services.