Deregulate To Regulate

Submitted by Molly Schwartz, Cross-Asset Marco Strategist at Rabobank

We have maintained the view that markets are sorely underestimating the impact that the war in Iran will have on global economies and financial markets, and that one day there would come a reckoning. While markets are still highly volatile and the situation in the Middle East highly uncertain, yesterday’s price action suggested that some traders are getting a reality check.

Remember folks, we’re still in a ceasefire! The iffy terms as to whether other countries in the region like Israel, Lebanon, and the UAE were fair game were never decidedly concluded, though the Strait of Hormuz was expected to remain open.

The drone attacks came after announcements from FARS early in the morning yesterday that the IRGC had struck an American warship near Jask Island, around 160km from the chokepoint (that’s 100 miles in freedom units). CENTCOM immediately denied that any US military assets had been struck, but the warship did appear to be associated with the UAE.

The drone strikes escalated further, with Iran attacking critical energy infrastructure in the UAE, including drones striking the Fujairah port—the first such attacks against the UAE in nearly a month, though these were not the first attacks targeted in Fujairah since the onset of the war. Iranian state TV quoted a military official who said that there had been “no premeditated plan to attack oil facilities in UAE’s Fujairah,” but rather it was the “result of the US military’s adventurism to create passage for illegal ship transit” through the Strait.

Trump announced that the US would spearhead an initiative called “Project Freedom” to escort ships who are “neutral and innocent bystanders” out of the Strait. There have yet to be concrete details provided, though the process technically began yesterday morning “Middle East time.” According to Bloomberg, the lack of clear assurances has left “several shipowners” skeptical, so it may take a while before we see anyone take up the Administration’s offer for “clear passage.”

US Treasury yields surged higher yesterday in a bear flattening fashion, with the 2 year up 8.3bp, approaching the 4.00% level, while the 10 year climbed 7.2bp to approach 4.50%. This comes as brent crude oil grinded back to $114/bbl amid the escalation in regional tensions.

With tensions escalating, US 2 year breakevens have also started climbing higher, breaking their highest level since April 8. Meanwhile, 5-year, 5-year inflation swap forwards have been heading higher as well, breaking their highest level since February 13 at 2.45%. The US OIS curve is reflecting this increased market hawkishness as well, now suggesting around 8bp worth of Fed hikes by year end.

We have posed the idea that the existence of what appears to be the world’s worst ceasefire comes as US efforts to de-escalate so as to escalate down the line. It also appears that the Trump Administration may have been deregulating to regulate.

In other news, the New York Times reported that the US is considering “vetting AI models before they are released.” This comes several weeks after an emergency meeting was hosted with leaders from major institutions, including Powell and Bessent, after it was discovered that Anthropic’s newest unreleased model, Mythos, posed serious cyber security issues if leveraged by malicious actors.

In early 2025, Trump rolled back a Biden-era executive order to establish guidelines for testing and regulating AI systems in his own executive order called “Removing Barriers to American Leadership in Artificial Intelligence,” which seeks to “revoke certain existing AI policies and directives that act as barriers to American AI innovation, clearing a path for the United States to retain global leadership in Artificial Intelligence.”

The approach as presented by the NYT suggests a change in hear from the Administration, as the executive order would “create an AI working group that would bring together tech executives and government officials to examine potential oversight procedures,” as well as a “formal government review process for new AI models.” When and if this executive order comes to fruition, it might be a fun exercise to compare and contrast the Biden and Trump orders and see how much they have in common.

The US Treasury Department released its QRA yesterday, announcing USD 189bn in net borrowing for Q2, up USD 79bn from its Q1 estimates due to “lower projected net cash flows,” but “partially offset by the higher-than-assumed beginning-of-quarter cash balance” which is USD 122bn higher than previously estimated. Additional details will be released on Wednesday.