April 2026: Bohemian Rhapsody and Iran on My Mind

Bohemian Rhapsody and Iran on My Mind: Cetina Talks Treasury

As I have watched financial markets since the start of the Iran conflict I keep thinking about an amended version of Queen’s iconic Bohemian Rhapsody:

Nothing really matters, anyone can see

Nothing really matters

Nothing really matters to me

Any way the Iran headlines/winds blow.

There is a now familiar rhythm in global financial markets since the start of the Iran conflict 9 weeks ago:

bad news surfaces,

prices wobble,

a random headline comes out and somehow TACO magically will reopen the Strait,

then equities rally, spreads tighten, and

the consensus reassures itself that geopolitics never matter.

It is a tired trope — as tired as the pre-2007 assertion that US home prices could never fall nationally. Neither trope is a law of physics. Markets have a habit of ignoring risks until those risks are realized. Don’t let that be your bank. That is the theme of the April Treasury Talk column.

·       Q1 large US bank results were strong.

·       Private credit is under strain, but unlikely by itself to cause a recession.

·       This week is a heavy calendar of US corporate earnings and will offer insight into how robust corporate profits are as the commodity price shock from the Strait of Hormuz’s closure continues to unfold.

·       A new Federal Reserve is coming into view – one that wants banks to pay it for liquidity as opposed to paying banks to liquidity.

·       And the Iran conflict — underpriced, misunderstood, and unresolved —is the variable that determines whether the US economy navigates 2026 with “only” elevated inflation or tips into recession.  The Iran conflict is now two months long and the timeline for the conflict’s end has shifted 8 times since it began.

But nothing really matters, it seems, until it does.

Q1 Large Bank Earnings: Very Strong, But A Contemporaneous Indicator

Let’s begin with some genuinely good news. Q1 2026 large US bank earnings — JPMorgan, Citi, Wells Fargo, and Bank of America — showed no contemporaneous evidence of credit deterioration. Credit data were benign across both commercial and consumer books. Non-accruals were down y/y at JPM and BAC. There was no evidence of rising recession risk embedded in Q1 bank results, and the earnings season triggered a notable rally in private credit markets.

One core banking blemish was Wells Fargo, where net interest margin came in weak — down 13 basis points sequentially — a reminder that the rate environment remains challenging for liability-sensitive franchises.

But strong Q1 large bank earnings results should not be mistaken for an all-clear signal. Bank earnings are, by their nature, not leading indicators. The biggest risks to the outlook stem from the Iran conflict, and they are material.

Private Credit: An Amplifier, Experiencing a Run on Semi-Liquid Vehicles

Private credit has been a topic I have been tracking carefully, and the picture is increasingly uncomfortable since I wrote about this in March.

Loans in this space grew rapidly during a period of abundant US financial sector liquidity — a period that, for now, is over given the policy shift underway in Washington regarding the Fed’s balance sheet.

The core problems in private credit are mutually reinforcing:

·       Underwriting quality was inadequate at some firms during private credit’s growth phase.

·       Valuation risks inherent in mark-to-model accounting are now clearly in view with assets valued at par until suddenly they are not.  Whose marks can be believed?

·       Software credit concentration is a specific sectoral weakness. Credit losses there would further add to BDC leverage.

·       As a result, there are run-like redemption dynamics in semi-liquid private credit funds.  Gating/redemption limitations in private credit can amplify redemption dynamics.  Redemptions reduce liquidity and make it more challenging for BDCs and private credit firms to fund the companies that they lend to.

·       Potential Fed rate cuts reduce the value of private credit assets — these are predominantly SOFR-linked floating rate loans — which increases the leverage of private credit funds. This is a dynamic that some market participants have not fully internalized.

·       As I noted last column, risk of ratings downgrades is rising. Moody’s changed its private credit sector outlookfrom positive to negative in April, increasing the plausibility of BDC downgrades.

·       Some BDC ratings sit right at the cusp of investment grade even as Merton models commonly available in Bloomberg suggest the implied default probability from the equity market reflects downgrades into high yield territory.  Ratings downgrades are plausible in the months ahead and would constrain funding vehicles that issue debt to finance private credit.

However, at $1.5 to $2.1 trillion, private credit is an amplifier of stress, not a standalone systemic risk. But it is an amplifier that is now live. The question of what could amplify private credit stress brings me to the central issue.

The Iran War: Financial Markets Are Disconnected from Reality

The April 8 US-Iran ceasefire announcement moved markets meaningfully — front-month oil futures peaked on the news, and sentiment improved.

Yet markets seem unable to fully price in that this is not a durable resolution.  TACO hope springs eternal although it does take both sides to TACO and then there is the issue of demining the Strait.

The gap between the US and Iranian negotiating positions remains enormous.

·       The US wants no Iranian nuclear capability for twenty years and no Iranian control of the Strait of Hormuz.

·       Iran’s position — hardened by what it has learned from Venezuela and recent events — is that only nuclear capability keeps its leadership safe. It wants funding for full reconstruction and rearmament, and it seeks control of the Strait.

The 2015 US Iran nuclear deal — the JCPOA — took approximately eighteen months to negotiate, and that was under conditions of clear Iranian leadership and greater bilateral trust.

Let’s take stock of each side’s challenges/vulnerabilities:

US challenges:

·       American defense technology was oriented toward fighting the last conventional war and is challenged by Iran’s asymmetric capabilities — drones, ghost fleets, and mine-laying in the Strait. Iran is able to produce more of these weapons during the ceasefire.

·       As a result, this conflict would be very costly in both financial and human terms for the US to win.

·       The May 1 War Powers Act deadline is fast approaching; Congress has not authorized the use of force, and presidents must terminate military operations after 60 days absent Congressional authorization, with one 30-day extension available.

·       Temperatures in the Gulf are rising as summer approaches, which poses a health and safety challenge for US forces.

·       Polling suggests the conflict is unpopular domestically, and the Administration has done a poor job explaining its rationale for the war to the American public and indeed the world.

·       Financial markets matter to the Trump Administration; they do not matter to Iran.

·       The difficulty of controlling Israel further complicates what should be a bilateral negotiation.

Iranian challenges:

·       The US blockade is forcing Iran’s oil industry toward shut-in, and shut-ins are damaging to the Iranian oil industry’s long-term health.

·       The US blockade and the US Treasury are attempting to squeeze Iran financially.

·       Additional US forces— including the George H.W. Bush carrier — are en route to the Gulf.

·       Iran’s leadership has become more decentralized, which increases the risk of more militant responses, a coup, and the risk of a harsh Iranian negotiation position.

·       Both Israel and the Gulf states want the US to further weaken Iran.

Both sides may be using a drawn-out ceasefire to pressure the other, prepare for the next round, and deflect blame for the conflict’s coming negative impacts on key commodity prices like energy and food and the global economy (“we tried to negotiate with them”).

The net result is a longer conflict and H4L commodity prices.  A readout I received from the annual FT Commodity Conference held in Lausanne, Switzerland last week was sobering. Major commodity traders are of the view that other financial markets are delusional about the severity of the commodity shock now underway.

Here is what the data show: since the Iran conflict began, there has been a cumulative loss of approximately one billion barrels of crude oil and refined products. To put that in context, that represents roughly ten days of total global consumption. Strategic reserve releases across a number of countries have partially offset this loss, but demand destruction is now beginning to emerge in developing economies that simply cannot afford prices at these levels. This is not a scenario. This is the current state of global energy markets.

Even after a genuine ceasefire, de-mining the Strait will be a time-consuming and technically complex process. Normal shipping traffic cannot resume until that work is complete. This reality — independent of the negotiations — points firmly toward H4L commodity prices.  Bluntly, it appears that the US Administration has started a conflict in Iran for which three is no graceful finish.

Despite the ceasefire, late-2026 oil futures are now trading above their pre-ceasefire levels as of April 7, 2026 — the market is pricing in structurally elevated oil prices even as front-month futures ping pong in response to news and headline sentiment.

Iran shock — Inflation vs. Recession: Thinking About US Macro Risk

Macroeconomic risks are acute for Europe, Gulf States, Australia and Taiwan. Absent a quick resolution to the Strait’s closure, a synchronized multi-country recession is possible.

The US economic outlook for the remainder of 2026 hinges, in my view, primarily on how long the Strait is closed and whether further commodity producing assets (oil wells, refineries, chemical plants) are destroyed in the Gulf.

Let me offer two frameworks for thinking about the inflation versus recession risk tipping point.

Framework 1: Using Bloomberg’s macroeconomic “SHOK” model to consider implications for US inflation and growth

$100 WTI is estimated to add ~100 basis points to US inflation — and that is likely an underestimate given the outsized impact on refined products and gasoline, which have a disproportionate impact on inflation.

Before the April 7th ceasefire, one-year TIPS breakevens had priced US CPI >5%, perhaps capturing more of the inflation risks stemming from elevated prices for refined products like gasoline ahead of the upcoming summer driving season (in addition to producing oil the Gulf contains many refineries).  I like to watch 2-year and 3-year TIPS breakevens as well for evidence that the bond market does not view the shock as “transitory.”

At $100 WTI, the headwind to US growth is ~ 0.4% q/q — roughly equivalent to the stimulus provided by Q1 2026 OBBA tax refunds — so for now they effectively cancel each other out.

But WTI above $100 per barrel beyond Q2 2026 materially increases US recession risk. At that level, the energy tax on consumers and businesses begins to compound. Corporate margins compress. Consumer confidence deteriorates. Employment conditions may begin to weaken. The longer the Strait stays closed to normal shipping traffic, the more likely we approach that tipping point threshold into a US recession.

A Taylor Rule, calibrated to the FOMC’s March 2026 Summary of Economic Projections median parameters for r* and NAIRU, suggests that US monetary policy was already somewhat too loose before the Iran conflict escalated.

As we head into this week’s April FOMC meeting, it is evident that if recession can avoided that policy is not well positioned with the Fed funds rate at 3.75% for an inflation shock.

To me, this implies that with the Strait traffic still not restored

·       the Fed will only cut interest rates if/once recession risks become apparent;

·       the Fed will raise rates if it perceives long-run inflation expectations are deanchoring (watch inflation expectations carefully; surprise Fed tightening has a tendency to cause breakdowns in the financial system).

Framework 2: A Fed Cut as Recession Signal

The second framework runs in the opposite direction, but is equally important. In the current environment — with inflation above target, commodity prices elevated, and geopolitical uncertainty running high — a Fed rate cut would function as a recession signal.

Markets would interpret a cut as an acknowledgment by the Fed that the economic deterioration had become severe enough to outweigh inflation concerns. That interpretation shift — from inflation-fighting mode to recession-response mode — could itself accelerate the repricing of risk assets. A cut in this environment could become an automatic trigger for a shift in recession pricing across credit, equities, and rates.

In sum, the Iran conflict creates a difficult situation for central banks and the global economy.

The New Inflation Regime

At this juncture it is appropriate to make a point that hopefully is fully appreciated in bank boardrooms and ALCOs. Since 2019, the global economy has been hit by a sequential series of negative supply shocks:

COVID-19,

the Ukraine war,

the US tariff escalation of 2025, and

now the Iran conflict.

There is a message for banks when we have been hit serially with low-probability inflation events. This is the new normal. We have entered a structurally different inflation regime — one characterized by more frequent supply disruptions, more geopolitical conflict, stickier inflation, and greater interest rate volatility.

For banks, this has direct and serious implications. The interest rate risk models calibrated to the post-2008 era of anchored inflation and suppressed volatility are no longer fit for purpose. The era of predictable, range-bound rates is over, yes, even with the upcoming transition to Kevin Warsh as Fed Chair.

The Warsh Fed: A More Restrained Balance Sheet and Delegate Supervision?

It now appears that Kevin Warsh’s nomination to lead the Federal Reserve will move forward. This deserves careful attention from bank treasury and ALM teams, because a Warsh Fed can be expected to be meaningfully more restrained in its use of the Fed’s balance sheet — and that has profound implications for bank liquidity management.

I have discussed this in prior Treasury Talk columns.

The Administration has identified the right problem: the Fed’s balance sheet has been allowed to grow in ways that have distorted financial markets, created moral hazard, and generated an environment of artificial liquidity abundance. On that diagnosis, I have considerable sympathy with the Administration’s position.

However, the structural risks are material.

·       The Fed has spent years conditioning the global financial system — banks and non-banks alike — to operate in an environment of abundant reserves;

·       Effective regulation and supervision of both liquidity risk and interest rate risk in the US banking sector remains inadequate; and

·       Iran has created an additional layer of macro uncertainty and liquidity stress.

What do I mean by the last point?  The Iran conflict is generating a structural increase in global dollar demand. Commodities are priced in US dollars. A commodity price shock of this magnitude — across oil, refined products, fertilizer, aluminum, and other inputs — contracts the real US dollar money supply.

This creates upward pressure on the dollar in the near term, even as it may sow the seeds of longer-term reserve diversification away from USD if the US loses the war with Iran and the petrodollar system and US relations in the Gulf are damaged.

At the same time, a Warsh Fed also may attempt to further pare back the Fed’s bank supervision.  For example, the Federal Reserve Board could rely even more on state regulators’ oversight of state chartered/Fed member banks even as it retains holding company oversight as this power

From the Fed Paying Banks IORB to Banks Starting to Pay the Fed for Borrowing

Let me be candid about what I believe is actually driving the push for a smaller Fed balance sheet. The goal appears to be reducing the size of Fed liabilities that pay interest to banks — specifically, interest on reserve balances (IORB) — and migrating the US banking system toward a model where banks borrow from the Fed more frequently, as they did in the pre-2008 corridor framework.

I understand the intellectual appeal of this model. It reduces the direct fiscal cost of excess reserves, restores a more traditional relationship between the Fed and the banking system, and, in theory, provides the Fed with finer control over short-term rates.

But in a world of scarce reserves, individual bank liquidity management becomes more consequential, and the distribution of reserves across the system becomes a source of potential stress. The March 2023 bank failures were, in part, a story about how quickly deposit outflows can overwhelm a bank’s liquidity buffers when the broader liquidity environment shifts due to central bank tightening. A Warsh Fed pursuing balance sheet normalization, in the context of an Iran-driven commodity shock and elevated dollar demand, is a combination that bank treasury teams should be actively stress-testing for.

The transition to a different Fed balance sheet policy may not be smooth. Model it. Stress it. Hold more liquidity than you think you need.

Strait Scenarios

Let me conclude with a brief recap of the Iran scenario landscape as I think how long the Strait is closed/whether additional asset in the region are damaged is very foundational to the economic and banking outlook:

Happy de-escalation (less likely):

·       Risk premia in shipping, energy, and commodities decline.

·       Financial conditions stabilize.

·       Private credit remains under stress but a US recession is avoided.

However, the US is no longer viewed as a global hegemon; the dollar weakens structurally; Treasury yields rise; and H4L interest rates become the source of risk.

Continued US blockade and financial pressure on Iran (most likely):

·       H4L commodity prices persist; financial conditions tighten.

·       Depending on the duration of the Strait closure, this could mean “only” elevated inflation and H4L interest rates — or it could mean a synchronized global recession.

US aerial assault and Iranian military response in the Gulf (less likely):

·       Significant destruction of energy-producing assets; dramatically higher energy and commodity prices.

·       Repatriation of Gulf assets and a rising likelihood of a Suez Canal moment for that weakens the US dollar.

·       Gulf states redirect investment toward resilience.

·       US interest rates rise.

·       A synchronized global recession is the primary source of macrofinancial breakdown, with private credit as a significant amplifier.

“Nothing really matters” — until it does. I hope banks are convening ALCOs more, increasing liquidity and evaluating hedging strategies.  The question is whether your bank is positioned for a moment when the market decides the Strait matters.

Upcoming speaking engagements:

FIS Customer ALM Conference, San Antonio, TX — May 27-28;

Fitch/KPMG New York Banking Summit, NYC — June 17;

Concentrate CRE Banking Conference, Austin, TX — September 14-16.

Jill Cetina, CFA is Executive Professor of Finance at the Mays Business School, Texas A&M University, and a former Associate Managing Director at Moody’s and former Federal Reserve officer. The views expressed here are her own.