The bond market has outsourced its inflation forecast to Mr Trump

THE 10-Year Treasury yield touched 4.75% recently, an 18-month high, as investors feared that the war with Iran would push oil, and then inflation, beyond the Federal Reserve's comfort zone. A few days later, on the back of renewed diplomatic signals from Washington, it had retreated to around 4.63%. Brent crude had dropped sharply from above $100 over the same stretch. The headline cause is always the same: Iran deal hopes. The deeper cause is that the bond market has outsourced its inflation forecast to a president who speaks to it through press conferences and social media.

The chain is mechanical enough. Lower oil prices ease the threat of energy-driven inflation, which lowers the probability of a hawkish Fed reaction, which lifts bond prices and depresses yields. On that reading, the yield curve is simply tracking crude. But the mechanism only works if the diplomatic signals are reliable. That is the problem. Mr Trump has said the war with Iran was "very complete" in March, and warned that the talks were Iran's last chance, according to a CNBC headline. Both times, Treasury yields obediently adjusted in the short term.

To be sure, the conflict genuinely disrupted markets. When the United States and Israel launched strikes on Iran on February 28th, Tehran responded by closing the Strait of Hormuz, through which roughly a fifth of the world's oil supply passes. Brent crude briefly topped $100. WTI, America's own benchmark, flashed $119 in overnight trading before settling lower. The Federal Reserve found itself looking at a supply shock it did not want. Markets priced in roughly 80% chance of a rate hike in September before the central bank left rates unchanged in July, with three dissenting votes.

Then came the memorandum of understanding, signed on June 17th after more than 100 days of fighting. It stipulated the end of hostilities, the reopening of the Strait of Hormuz, the lifting of sanctions on Iranian oil exports, and a 60-day negotiation window on the nuclear programme. Oil prices tumbled. The S&P 500 and the Dow closed at record highs. Rate traders cut the probability of a September hike to about 65%. As of August 4th, markets price roughly a 63% chance of a 25-basis-point increase, down from that recent ceiling. The 10-year yield is now about 0.41 percentage points higher than a year ago but below its summer peak.

Yet the memorandum is less a peace deal than an agreement to have a peace deal. Observers at Al Jazeera described it as "the wedding ceremony without the ring". The substantive disputes that triggered the war - the fate of Iran's 440kg stockpile of highly enriched uranium, the scope of international inspections, whether enrichment is permitted at all, the future of Iran's missile programme - are all deferred. The United Kingdom's parliamentary library, which has been tracking the negotiations, notes that no official text of the 14-point memorandum has been published. What is known comes from third-hand briefings. Meanwhile, on August 4th, Mr Trump warned that the current round of talks was Iran's last chance to end the war, according to a CNBC headline, while Tehran denied that negotiations were even under way.

The bond market does not appear to care very much. Or rather, it cares about the wrong thing. It reacts to the headline, not to the substance. When Mr Bessent, the treasury secretary, says a deal is imminent, yields fall. When Mr Trump says the war is over, oil drops. When Iran pushes back, the effect fades. The system works fine until the headlines are false again - and they already have been.

This is not just a problem of market sentiment. It is a problem of monetary-policy transmission. The Federal Reserve, under Kevin Warsh, has deliberately withheld forward guidance, offering little clarity on whether it will hike, cut or hold. Mr Warsh is reportedly considering reducing the number of policy meetings from eight per year, a change that would give individual data releases and geopolitical shocks even more outsized influence between meetings. In that vacuum, the bond market has filled the interpretive gap with diplomatic headline-trading. The July "twist" in the yield curve - where short-term yields held up while the long end sold off before pulling back - reflected a market that is less sure about Fed policy than about Middle East diplomacy.

The danger is not immediate chaos. It is slower: a bond market whose inflation expectations are increasingly driven by diplomatic signalling rather than by wage growth, housing costs, services inflation or productivity. When the next false dawn comes - and past experience suggests it will - the repricing will be sharp. Oil could spike again. But the more durable damage is to the Fed's credibility. If interest-rate expectations are set by Twitter threads rather than by Mr Warsh's dots, then the central bank's ability to manage the inflation anchor through communication erodes, regardless of what it does at its meetings.

The better answer is not to blame traders for pricing geopolitical risk. They are doing their jobs. It is to demand more clarity from the Fed. Mr Warsh's reluctance to signal a preference - whether to raise rates, hold or cut - is intellectually honest but practically destabilising. When the central bank withholds its own inflation forecast, the market will invent one. The current one is written in diplomatic headlines, which makes it unreliable.

The Iran ceasefire is real enough. Oil prices have fallen enough to ease the most acute inflation fears. But the bond market's relief rally is a reminder of a structural fragility: when monetary-policy expectations are more sensitive to a president's mood than to economic data, the system works only as long as the headlines are honest.