"In this sort of supply shock you are in a regime which is typically flattening at the curve. You have commodities leading the price section. Higher for yields. Flatter curves... U.S. inflation is already well above target. If you add to that... we think the Fed should hike." The combination of a Middle Eastern oil supply shock and existing sticky inflation creates a stagflationary environment. Central banks will be forced to prioritize fighting inflation over supporting growth, meaning interest rates will stay higher for longer, which directly crushes the value of long-duration bonds. SHORT. Long-dated US Treasuries will lose value as the market prices out rate cuts and begins to price in the risk of further rate hikes. A sudden peace agreement in the Middle East causes oil to crash, leading to rapid disinflation and aggressive Fed rate cuts.