WE Think: The Bond Storm Meets $100 Oil — Financial Crisis, or Stagflation?

The backdrop

September was ugly for Chinese equities. The Shanghai Composite lost 3.61%, the CSI 300 5.78%, and ChiNext and the STAR 50 — the two growth boards — fell 8.82% and 9.17%. The damage abroad was milder but telling: the S&P 500 slipped 0.45% while the Russell 2000 dropped 5.25%. Stocks and bonds fell together, which is the part that matters.

On October 1, the US 10-year Treasury yield briefly hit 5.34% — a peak last seen in April 2002. Japan’s 10-year rose to 3.126%, a 30-year high. German and French 10-year yields neared 3.62% and 5.00%, widening the Franco-German spread to 133 basis points. You have to go back to 2006–07, the eve of the subprime crisis, to find the US 10-year above 5%.

Two questions follow. Can yields at these levels crack something in the financial system? And with oil at $100 and Hormuz blockaded, is the world walking into stagflation? For an equity investor, the answers decide everything about how you position.

Why yields are where they are

Start with energy. The US–Iran conflict has kept the Strait of Hormuz shut for more than seven months, the worst energy disruption in modern history. US CPI hit 3.4% in August, the 66th straight month above the Fed’s 2% target. This is not inflation that is fading. It is inflation that is settling in.

Then there is the fight for capital. Big tech’s spending on AI and data centres has exploded, much of it funded with debt, and all that new paper has to be absorbed by the same bond market. On September 16 the Fed raised the funds rate 25 basis points to 3.75%–4.00%, unanimously. But energy alone cannot explain the sharpest quarterly run-up in Treasury yields this century.

Underneath both sits the fiscal picture. US federal debt is above US$40 trillion, and most of the G7 carries debt-to-GDP ratios over 100%. Lenders want to be paid for that, and the term premium is where they send the bill.

Does this end in a crisis?

Every sustained rise in Treasury yields and the dollar has, eventually, found the most inflated bubble in the system and burst it. That is the pattern. This time sovereign yields are high and big tech is issuing at fatter coupons, which leaves ordinary businesses bidding for money that gets dearer by the week. A handful of rate-sensitive sectors are already feeling it. Credit conditions are tightening into the real economy. We watch that transmission most closely.

How 1973 actually happened

The 1970s did not start with an oil embargo. Oil was the match. The fuel had been piling up for years.

It started with policy running hot in two directions at once. In the late 1960s Johnson fought Vietnam and built the Great Society without raising the taxes to pay for either, and the Fed went along with it instead of leaning against it. By October 1973 US CPI had gone from 3.3% in 1972 to 7.4%. The inflation was there before a single barrel was embargoed.

Then the anchor went. In August 1971 Nixon closed the gold window and Bretton Woods died. Without convertibility the dollar fell and liquidity poured out, and inflation stopped being an American problem and became a global one.

Then came the price controls, which is the part people forget. That same August, Nixon froze wages and prices for 90 days. For more than a year the freeze made the inflation statistics look better than the inflation. Controls do not reduce demand; they manufacture shortage. When the freeze became impossible to hold in 1973, just as the embargo landed, every suppressed price came out at once.

Then oil hit, and then it hit again. In October 1973 the Arab–Israeli war brought an embargo and crude went from under $3 to $11.65 in three months. In 1979 the Iranian revolution took 60 days of exports off the market, a global shortfall of about 5 million barrels a day; the Iran–Iraq war took it to 5.6 million. Crude ran from $13 to $34–41. Across the decade prices rose more than tenfold, and a 2.9% fall in world grain output in 1972 made the food side worse.

Finally, wages closed the loop. Roughly one American worker in four was unionised, many on contracts with cost-of-living clauses tied to CPI. Oil raised prices, prices raised wages, wages raised costs, costs raised prices again. Once that loop closes, it feeds itself.

The tally: CPI peaked at 12.3% in December 1974, and again at 14.8% in March 1980. Growth averaged 3.2% a year against 4.3% in the 1960s. For ten years the equity market went nowhere while prices more than doubled.

It took Volcker to end it. In August 1979 he switched the Fed’s target to the money supply and took the funds rate to 20%. A deep two-year recession and 10.8% unemployment bought inflation back down to 3% by 1983. Nobody cured stagflation. It had to be broken.

What is different this time

The resemblance is real: oil started both episodes, both pushed inflation up and growth down, both put central banks in a box. But the differences are larger than the resemblance.

First, the shocks are not the same size. Crude tripled in three months in 1973. This time it is up roughly 40%, and the Strait is blockaded, not closed.

Second, and this is decisive, the Fed is on the other side of the trade. Burns accommodated. He believed inflation was cost-push, and therefore beyond the reach of rate rises, so he let real rates stay negative for years. Today’s Fed has the funds rate at 3.75%–4.00% with the 10-year at 5.34% and CPI at 3.4%. Real rates are close to two points positive. The mechanism that turned a price shock into a decade of inflation is simply not switched on.

Third, the wage loop is broken. Union membership has fallen from 25%–30% to about 10%, and just 6% in the private sector. Indexation clauses have all but vanished. September’s average hourly earnings are expected near 3.2%, and CPI has run ahead of wages for five months straight. You cannot get a wage–price spiral when wages are losing ground.

Fourth, the economy uses far less energy per unit of output. In the 1970s energy demand and GDP moved in lockstep and oil was half of primary energy. Today a unit of energy produces three times the output it once did, and oil is 35% of the mix. The fiscal starting point has moved the other way, and that is the real risk: debt was 30% of GDP then; now it is past US$40 trillion, well over 100% of GDP. The danger is not a 1970s rerun. The danger is high yields arriving at a sovereign balance sheet that has never carried this much.

So our call is that America is not in stagflation. It is in slow growth with expensive oil and expensive money. Tightening should cool demand from here. But if Middle Eastern supply does not normalise within a year or two, weak growth and sticky inflation can sit side by side for longer than most portfolios are built for.

The most exposed players, though, are not in Washington. They are in Brussels and Tokyo. America has its own energy, an AI capex boom and a government that is still spending. Europe and Japan import theirs, have little fiscal room, and are being pushed into tightening anyway. Three squeezes at once.

China tells a different story under the same shock. Its energy mix is diversified, its transport the most electrified in the world, and its manufacturing base more resilient than anyone expected. The numbers confirm it: goods exports reached RMB 20.17 trillion (about US$2.8 trillion) in the first eight months, up 14.6%. But the price signal is more interesting. Higher oil prices, on top of Beijing’s campaign against cut-throat competition — the “anti-involution” drive — are pushing midstream industries to raise prices for the first time in years. The same oil shock that spells inflation for America may turn out to be China’s way out of deflation, by letting prices in part of its industrial economy return to something like normal.

What survives high rates and high oil

Higher discount rates do not punish all assets equally. The damage falls hardest on cash flows that arrive furthest in the future. The more of a company’s value is concentrated in year ten, the more of it disappears when the discount rate moves. Cheap assets with earnings today are the ones that hold.

The 1970s are the test case. The S&P 500 returned 17% in nominal terms over the decade and −1.6% in real terms. The Dow was 903 in January 1965 and 876 in January 1980, and in between consumer prices more than doubled. Earnings grew 9% a year. The multiple halved. What got destroyed was not profits. It was the price investors were willing to pay for them.

Gold went from $35 to $850 an ounce, better than 30% a year. Bonds were the worst asset of the decade. Within the index the split was brutal: energy, materials, staples, pharma and utilities, the sectors with pricing power and cash coming in today, held their ground, while tech, financials and consumer discretionary lagged.

The instructive case is T. Rowe Price. Its two growth funds were among the best performers in the business going into 1973. But Price had seen the inflation coming as early as 1969 and launched the New Era Fund around its beneficiaries: resource stocks and short-duration bonds. By 1982 New Era was at the top of the rankings and the two growth funds were at the bottom. The lesson was not to sell equities. It was to rebuild the portfolio for the regime you are actually in.

Investment strategy

Our Four Seasons framework still has Chinese equities in summer: past the bottom, when everything was deeply undervalued, but nowhere near bubble territory. September’s correction — the global bond storm plus expensive oil — was another summer thunderstorm. It soaks you. It does not change the season. Time and again, short-term volatility turns out to say nothing about where a market sits in its cycle. A farmer in summer does not stand in the field worrying about the rain. He weeds, fertilises, keeps the irrigation running, and lets the crop do what crops do.

In practice that means modest structural shifts rather than a change of stance. We are cutting back where valuation leans on cash flows far in the future, and on long-term assumptions that all have to be right for the price to work. We are adding in the upstream and midstream, where earnings today line up with the multiple and where high energy prices and supply-chain reordering are a tailwind rather than a cost. And we are watching the midstream manufacturers that stand to gain as the anti-involution campaign forces prices back up.

Wu Weizhi

Yingde, Guangdong

October 5, 2026

本期《偉志思考》簡體中文版鏈接：

偉志思考：債市風暴與百元油價，會引發金融風險與滯脹麼？