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CONTRIBUTORS

Robert O. Abad

Western Asset

Prashant Chandran, CFA

Western Asset

René Ledis

Western Asset

Nicholas J. Mastroianni, CFA

Western Asset

Wilfred Wong, CFA

Western Asset

Israel launched airstrikes on Tehran early Friday, zeroing in on nuclear and military installations. The attack follows Iran’s announcement of a third nuclear enrichment facility, a move that immediately drew censure from the International Atomic Energy Agency (IAEA) for the first time in two decades. Nineteen of 35 IAEA board members—including the US, UK, France and Germany—backed the rebuke, citing Iran’s failure to meet non-proliferation obligations.1 According to the IAEA and independent monitors, Iran has now enriched uranium to 60%, raising concerns among international observers that it has amassed enough material to rapidly produce weapons-grade stock.

For Israeli Prime Minister Benjamin Netanyahu, the nuclear threat is existential. Netanyahu has long warned the world of Iran’s nuclear ambitions, famously drawing a “red line” at the UN in 2012 and lobbying against the JCPOA nuclear deal.2 With his political standing weakened at home, some analysts suggest that Netanyahu may see confrontation with Iran as both a strategic necessity and a means to rally domestic support.

From an investment perspective, global oil markets are the first to feel the shockwaves. Oil futures are currently spiking as traders brace for potential Iranian retaliation, uncertainty over how much Iranian supply could be disrupted, and the risk of a wider regional war that could draw in the US and disrupt key chokepoints like the Strait of Hormuz.

The response in US rates markets has been muted so far, with a bull-steepening of the Treasury curve, but the risk of sustained energy price volatility looms large. We would note that rising oil prices risk undoing recent disinflation progress and dampening consumption, adding another layer of complexity to the Fed’s policy decisions as it balances inflation concerns with the need to sustain economic growth. Tariffs are expected to show up in goods inflation in the coming months and rising energy prices would create even more uncertainty.

For emerging markets, the fallout is mixed but tilts negative if geopolitical tensions escalate and the US dollar strengthens in a flight to safety. Oil exporters like Russia, Saudi Arabia, the UAE, Brazil, Nigeria, Angola and Colombia could benefit from higher prices. In contrast, major importers—China, India, Turkey, the Philippines and Egypt—face immediate headwinds, in our view.

For decades, the prospect of open war between Israel and Iran was considered too dangerous to contemplate. That calculus may be changing. The region now stands on the brink, with multiple aligned flashpoints and a high risk of miscalculation. Diplomatic maneuvering, saber rattling, and domestic political pressures in both Washington and the Middle East create a volatile mix reminiscent of past crises—only this time, the stakes are even higher.

Endnotes

  1. Source: “Iran announces a new nuclear enrichment site after UN watchdog censure.” Associated Press.  June 12, 2025.

  2. The Joint Comprehensive Plan of Action (JCPOA), or Iran nuclear deal, was signed in July 2015 between Iran and the P5+1 (China, France, Russia, the UK, the US and Germany). Under the agreement, Iran agreed to restrict its nuclear program and allow IAEA inspections in exchange for sanctions relief, with the goal of preventing Iran from developing a nuclear weapon.

 

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