TACO Filling

I wrote last week that to trade the curve, you needed to have a view on all kinds of factors affecting yields - including things like pandemics, banking crises, and even war. Ditto if you are an economist or strategist. It seemed clear last week that Trump wants to TACO. Iran wants a comprehensive deal, and not just a ceasefire. While the media discusses how far apart the two sides are, IMO there seems to be plenty of room to negotiate a win-win agreement.

But first the week in news:

· The Trump-Xi meeting is set for May 14-15. This makes it slightly more likely that some “conclusion” could be reached regarding Iran in the coming weeks.

· Iran rejecting the US proposal provides very little information. The reason is because accepting would just be surrender. In the early phases of a negotiation, it makes no sense to say “sure!”

· Similarly, Iran always has to say “they will fight forever,” “they are not negotiating,” “death to the US,” or whatever, because high oil prices and their ability to asymmetrically attack neighbors are their only leverage. There is no information content in any negative Iranian commentary or actions. Even if they wanted a ceasefire, they can’t say they agree – otherwise oil prices will collapse and they will have no leverage in talks.

· Speaking of leverage, the Houthis attacked Israel. It will be interesting to see if they go after Red Sea oil. That would cause a larger spike in oil and escalate the war (since Saudi Arabia may also get involved). Just as Trump may say escalatory things during a negotiation, the Iranians may try to leverage perceived escalation in talks.