Oil Above $100, Fed Hikes, and the TACO Trade’s Toughest Test Yet

Oil Above $100, Fed Hikes, and the TACO Trade’s Toughest Test Yet

TREE NEWS reports: U.S.–Iran hostilities have now run nearly seven months, with the Strait of Hormuz and the Red Sea still flashpoints. West Texas Intermediate crude is hovering above $100 a barrel, the Federal Reserve has raised interest rates for the first time in three years, and the 10-year Treasury yield is pressing against 4.946% — a level widely watched as a trigger for equity corrections. Despite this, Wall Street continues to lean on a strategy nicknamed “TACO” — short for “Trump Always Chickens Out” — betting that the White House will ultimately de-escalate rather than let markets slide.

The latest twist: Washington has agreed to let Iranian leaders attend next week’s high-level UN General Assembly session in New York, even as the two countries remain in a shooting war. President Trump said Wednesday he wants the conflict to end “soon” and claimed to have communicated “directly” with Tehran, remarks that briefly pushed oil lower. The question investors are now asking is uncomfortable: what happens to the TACO trade if, this time, Trump does not blink?

What Is the TACO Trade?

The term began as a tongue-in-cheek column label but has become a real market force. Its logic rests on Trump’s well-documented sensitivity to financial markets — particularly the stock market, which he has long treated as a scoreboard for his administration. Investors assume he is especially wary of any selloff that could damage Republican prospects in the midterms.

The strategy’s defining moment came on April 9, 2025, when Trump paused reciprocal tariffs on most trading partners for 90 days, halting a selloff that had pushed major indexes to the brink of a bear market. Since then, the playbook has been simple: buy the dip, assume the pivot.

Why the Mechanism Is Weakening

The core premise of TACO is that falling stocks force Trump to seek a deal. That transmission channel is now fraying. The Fed’s rate hike on Wednesday produced the worst single-day equity performance in three months, but stocks stabilized quickly. The Dow is down 2.6% this month, while the S&P 500 and Nasdaq have slipped only 0.6% and 0.1% respectively.

This creates a paradox: because equities have not fallen far enough to hurt, the pressure on Trump to negotiate is lighter. Some market participants worry that the market’s resilience could actually make the administration more hawkish on Iran. As geopolitical risk builds, traders are quietly abandoning their bets on a Trump retreat.

The Bond Market Is the Real Pressure Valve

With equities still holding up, the Treasury market is the better gauge of whether Trump will pivot. The 10-year yield at 4.946% is near the threshold that historically precedes equity drawdowns. Higher yields also raise government borrowing costs and feed directly into U.S. household mortgages, auto loans, and credit card rates — undermining the “affordability” agenda Trump has championed.

Meanwhile, the average U.S. consumer is paying $4.40 a gallon at the pump. High gasoline prices have historically been a political liability for the party in power, and pressure on Republicans ahead of the midterms is mounting.

Behind the Scenes, Talks May Be Advancing

Despite the grim mood, some analysts believe de-escalation may already be underway quietly. Signum Global’s Andrew Bishop notes that the exact start of every previous de-escalation only became clear after private talks surfaced publicly. A planned Monday meeting of Gulf and Iranian leaders in Oman was postponed, but Bishop says negotiations continue and are “making progress.”

Trump told reporters Wednesday night: “Hopefully we’re near the end of the war. They want to make a deal, we’ll see.” He said he had communicated “directly” with Tehran but gave no details. Those remarks, combined with news that Saudi Arabia is seeking to restore roughly half the capacity of a cross-border pipeline disrupted by Houthi attacks, pushed oil lower on Thursday.

Key Takeaways for Investors

• The TACO trade is not dead, but it is strained. The market pressure that normally forces a Trump pivot has not fully materialized, while geopolitical risk keeps compounding.
• Watch the 10-year yield, not just the S&P 500. A sustained move above 4.95% could become the trigger that forces a policy response — and a tradeable pivot.
• Oil is the swing factor. A U.S.–Iran deal could send crude sharply lower, lifting bonds and giving equities a powerful tailwind. A breakdown in talks does the opposite.
• Position for two-sided risk. With the market’s usual circuit breaker (falling stocks) less effective, investors should treat geopolitical headlines as the dominant driver of short-term volatility.