Steven Major Sees Bonds Facing Stagflation Scenario
Summary
- Global bonds are erasing year-to-date gains as elevated energy prices and slowing growth ignite fears of stagflation.
- The market's priced-in probability of a stagflation scenario has surged from under 10% at the start of the year to approximately 50% today.
- A structural block in the flow of oil has reversed previous expectations of a supply glut and $50-$60 oil prices.
- The current macroeconomic environment differs significantly from the 1970s stagflation era because the US is now a major oil producer, the population is older, wealth inequality is higher, and the technology backdrop is vastly different.
Trade Ideas
"There's a block in the flow of oil, and you can see it's gonna take some time to to ease that block... The US is a big oil producer." When global oil flows are constrained by geopolitical or logistical blocks, global energy prices rise. Because the US is now a massive domestic producer, US-based energy companies can capture these elevated global premiums without suffering from the localized supply disruptions affecting other nations. LONG US energy producers as they directly monetize the supply constraints driving the stagflation narrative. The block in oil flow is resolved faster than anticipated, causing oil prices to revert to the previously expected $50-$60 supply glut range.
"The market wants to price in that stagflation scenario. And let's just say it looks like a 50% probability weighting today, whereas it may have been less than 10% at the start of this year." Stagflation is the combination of slowing economic growth and sticky, high inflation. In this environment, central banks are paralyzed; they cannot cut interest rates to save growth because doing so would worsen inflation. This dynamic forces long-end bond yields to stay higher for longer, which mathematically crushes the price of long-duration bonds. SHORT long-duration Treasuries as the market continues to aggressively price in a higher probability of stagflation. Economic growth collapses so severely that it triggers a deflationary recession, forcing central banks to aggressively cut rates regardless of energy prices, which would cause long-duration bonds to rally.
"It's interesting to look at inflation breakevens, for example... the market wants to price in that stagflation scenario." As the market shifts its probability of stagflation from 10% to 50%, investors demand more compensation for future inflation. Treasury Inflation-Protected Securities (TIPS) have their principal value adjusted based on the Consumer Price Index. If inflation remains structurally elevated due to energy shocks, TIPS will outperform nominal Treasuries by capturing the rising inflation breakeven premium. LONG TIPS to hedge against the sticky inflation component of the stagflation scenario while avoiding the pure duration risk of nominal bonds. The energy shock proves transitory and inflation data cools rapidly, causing inflation breakevens to collapse and TIPS to underperform standard nominal Treasuries.
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This Bloomberg Markets video, published March 12, 2026, features Stephen Major discussing XLE, XOM, CVX, TLT, TIP. 3 trade ideas extracted by AI with direction and confidence scoring.