War RAG and Term Premium

TS Lombard assesses the Middle East energy shock using a RAG (Red-Amber-Green) framework, identifying an $80/bbl oil price recovery as the most probable outcome. However, the shock is already driving term premiums higher and challenging the hedging utility of bonds, especially in Europe and the UK.

Key Takeaways

• 1.The 'Green Zone' scenario, where oil prices revert to $80/bbl in Q3 2026, is viewed as the most likely outcome of the current Middle East supply shock.
• 2.Energy shocks are causing a rise in term premiums, particularly in the UK, as markets price in persistent uncertainty and a shift away from bonds as a reliable hedge.
• 3.The US economy appears relatively insulated from the physical supply disruption and is expected to reaccelerate later in the year, potentially leading to Fed rate hikes in 2027.

Table of Contents

• War RAG and term premium
• SCENARIOS EMANATING FROM THE MIDDLE EAST SHOCK
• US HEADLINE CPI REGIMES
• UK BONDS HAVE RISEN...
• BRENT VS US/UK/EA...
• EA REGIME SHIFTS - CORE INFLATION VS ENERGY PRICES
• NET EQUITY IMPULSE MATTERS MORE FOR PRIVATE CONSUMPTION IN...
• US HOUSEHOLDS HAVE B...
• SAVINGS RATE INCREASE...
• Disclaimer

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