Citadel: Markets Underestimate Odds of US‑Iran Strait Deal

Citadel Securities warned in a client note that investors may be underestimating the likelihood of a near-term US‑Iran agreement to reopen the Strait of Hormuz. The observation came from Citadel strategist Frank Flight.

Flight highlighted Iran’s internet connectivity rebounding to about 86% of pre-conflict levels, based on internet monitoring data, and the more frequent public appearances of senior Iranian military officials. He said those developments may reflect expectations in Tehran that hostilities are easing.

Negotiations between Washington and Tehran remain fragile. Officials have discussed a possible 60-day memorandum of understanding, and both sides have accused the other of breaches following recent US strikes on Iranian military targets.

Markets have reacted with volatile moves in oil, equities and government bonds as investors reassess geopolitical risk and the potential for disruptions to energy flows through the Strait of Hormuz.

Citadel quantified the potential market effects of a full reopening before the end of July: the 10-year US Treasury yield could fall by more than 12 basis points, the S&P 500 could rise about 1.7%, and the US dollar could weaken modestly. The firm identified airlines, retailers and homebuilders as likely beneficiaries of lower energy and borrowing costs.

In fixed income, easing tensions would likely reduce expectations for additional central bank rate hikes next year and could support a bond rally, the note cautioned. Citadel warned any rally might be short lived, citing resilient US economic activity, a strong labor market and ongoing AI-related capital spending that could revive inflationary pressures.

“We think markets may be underpricing the inflation risk from an improving US labor market,” Flight wrote.

The client note urged investors to weigh the potential for a rotation into sectors sensitive to energy and borrowing costs against the possibility that underlying inflation drivers could reassert, and it noted that macroeconomic trends will determine whether any market gains persist.