Muzinich Weekly Market Comment: Bittersweet

June 1, 2026

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May delivered strong returns and a renewed appetite for risk, but beneath the optimism lies an increasingly complex reality. While hopes of a US-Iran agreement have eased pressure on energy markets, investors and policymakers must now grapple with the prospect that higher energy prices and tighter supply conditions may prove more persistent than previously assumed.

May delivered more than many had hoped. For the vast majority of investors, net asset values rose in May, sending a quiet wave of confidence into the summer months. This was further demonstrated by our preferred index for market sentiment, the VIX, which closed the month with a 15 handle, suggesting confidence has returned, and investors are comfortable adding risk and reducing cash.

The dominant macro thread running throughout May was the back-and-forth of negotiations between the US and Iran, with a deal appearing tantalizingly close as the month drew to a close. The agreement on the table is a 60-day memorandum of understanding to extend the ceasefire and reopen the Strait of Hormuz (SoH) to unrestricted shipping, which sits on President Trump's desk pending approval at month-end.¹  

For investors and central banks alike, this is bittersweet news. The reopening of the SoH is a much-needed relief valve for energy markets that have absorbed a severe supply shock. Estimates suggest the global oil market has been running a deficit of approximately 7.5 million barrels per day since March 1st, contributing to a drag on growth while adding an unwelcome upward push to inflation worldwide.²

Yet there is a sour note in the fine print. Where initial speculation had pointed to a 6-month deal, what is currently on the table is just 60 days. US Treasury Secretary Bessent has been clear about the Administration's position: any long-term agreement requires Iran to open the SoH toll-free, surrender its enriched uranium, and end its nuclear programme.¹ Optimists will argue that negotiations are closer to achieving those objectives than many believe, and that 60 days is all that is needed. However, the more cautious view is that this window is almost certainly too short to strike a longer-term deal, to restore regional production to full capacity and rebuild inventories. Clearing mines from the Strait, restarting shut-in wells, and repairing structural damage are all processes that will most likely take considerable time.

Oil markets share this concern. Although the asset class was the clear underperformer in May – with Brent falling to the low US$90s per barrel, a decline of nearly 20% - the broader pricing structure still reflects a tight supply market. The consensus median forecast for Brent at year-end sits at US$84.50, roughly US$1 below the forward curve,³ and while the oil curve remains in backwardation, Brent does not appear to dip below US$70 until 2031 (see Chart of the Week I).

This leaves central banks and governments facing an increasingly uncomfortable question. Are energy prices still best understood as transitory, or are elevated levels a more persistent feature of the macro landscape? And if the latter is true, what constitutes the appropriate policy mix to achieve inflation and growth objectives in a world where these energy supply shocks have become more structural?

The answer is already taking shape, with two clear adjustments in motion since the start of March. The first is the need for a higher neutral level of policy rates across the globe. For the Bank of Japan (BoJ), which is mid-tightening cycle, little has fundamentally changed, though the energy shock may push the committee to move faster. For the European Central Bank (ECB), which normalized earliest among the major central banks, there is ground to cover. The overnight interest rate swap market prices in two 25 basis points (bps) hikes this year, with a 93% probability that the first lands in June.⁴  ECB Chief Economist Philip Lane validated the market’s view this week, saying there was no need to correct markets from anticipating a rate hike next month.⁵ 

The UK Monetary Policy Committee (MPC) and the US Federal Open Market Committee (FOMC) face less urgent but still real adjustments, as they lagged the ECB, leaving policy rates modestly above neutral; markets priced in one 25bps MPC hike in 2026 to reach neutral, while the FOMC will also need to tighten policy by 25bps to achieve neutrality by the first quarter of 2027.3

The second adjustment unfolding is at the long end of government bond curves, which is caught between two powerful forces of structurally higher inflation expectations pushing yields up, and the near-certain rise in fiscal spending as governments step in to shield households and businesses from the cost-of-living squeeze, even as high energy prices slow growth and erode tax revenues.

Putting the puzzle pieces together, government bond market price action looks rational. The US, German and UK curves have all bear-flattened, reflecting the dual adjustment to higher neutral rates and rising fiscal pressures. Japan stands apart, with its curve bear-steepening as bond vigilantes send a clear signal to the BoJ not to drag its feet on the policy adjustment process.

Looking ahead to the rest of 2026, the supply and demand imbalance in energy markets and the evolving path of oil prices are likely to play a dominant role in shaping government yields (see Chart of the Week II). Investors can also take some comfort in the fact that – unlike in 2022 – central banks have not been caught flat-footed with ultra-accommodative policy rates. However, government balance sheets may face greater scrutiny this time around, as there is significantly less room to raise spending or expand fiscal deficits while keeping indebtedness on a sustainable path over the medium term.

Chart of the Week I: Structurally higher energy prices – Brent above 70 until 2031?

Source: Bloomberg as of May 29, 2026. For illustrative purposes only.

Chart of the Week II: Is the Future Direction of UST10 Dependent on Oil?

Source: Bloomberg as of May 29, 2026. For illustrative purposes only.

All sources are Bloomberg unless otherwise stated.

Past performance is not a reliable indicator of current or future results.

References to specific companies is for illustrative purposes only and does not reflect the holdings of any specific past or current portfolio or account.

References

1. Bloomberg, “Trump Says ‘Final Determination’ on Iran Truce Is Coming Soon,” May 29, 2026
2. Goldman Sachs Research, “Oil Tracker: Visible Stock Draws Accelerate on Lower Exports; Weakening China Imports and
Demand,” May 20, 2026
3. Bloomberg, as of May 29, 2026
4. Bloomberg, as of May 29. 2026
5. Bloomberg, "ECB Set to Lift Its Inflation Outlook in June, Lane Tells Nikkei," May 26, 2026

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of May 29, 2026, and may change without notice. All data figures are from Bloomberg, as of May 29, 2026, unless otherwise stated.

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