Negotiations failed! The Strait blockade reappears, short-term risks rise but the market remains restrained; long-term peace still requires negotiation.

Middle East conflict update: First round of negotiations fails, Trump reinstates the Hormuz Strait checkpoint.

The U.S. and Iran held their first face-to-face talks on April 11 in Islamabad, Pakistan. After more than 21 hours of marathon negotiations, they ended without result. The two sides had significant differences on core issues such as nuclear capabilities and control over the Hormuz Strait. Although the overall negotiation atmosphere was relatively calm, no substantive agreement was reached.

In the short term, the failure of negotiations and the reappearance of the Strait blockade indicate that localized risks remain.

The failure of the first round of negotiations largely aligns with our expectations outlined in last Friday’s (April 10) report. In the contest for dominance over the Strait, Iran had previously proposed charging a 'protection fee' for passing merchant ships and stated it could not identify previously laid mines. Trump escalated further, announcing that the U.S. Navy would immediately blockade all vessels entering and exiting Iranian ports, instructing the U.S. military to inspect and intercept ships that have paid fees to Iran, while also deploying mine-sweeping vessels for related actions. This standoff between both sides has again intensified.

Immediate reactions in the financial markets show that WTI oil prices rose during this morning's Asian trading session, and the yield on the US 10-year Treasury bond increased, roughly returning to pre-negotiation levels. However, overall declines in Asian stock markets were kept within 1%, without significant panic selling, indicating that the market had already anticipated the negotiation outcome to some extent. It is necessary to continue observing both parties' subsequent moves in the short term to see if they will initiate new contact or return to the negotiating table. At present, it is judged that there is a higher probability of both sides reaching a partial, temporary interest exchange, but localized risks should not be overlooked.

From a long-term perspective, achieving an agreement faces high difficulty thresholds, making it hard to find a balance.

Although Trump stated publicly that some parts of the agreement are very close to being finalized, and he is indifferent to the outcome of a single negotiation, Iran considers the US conditions difficult to accept. The 10-point plan Iran presented prior to the negotiations still leans significantly toward Iran when compared with the Iran nuclear deal reached with the Obama administration in 2015, especially on core issues like nuclear weapons and control over the Strait of Hormuz, which are crucial to the US's position as a global power. There remains a significant gap in key interests between the two sides.

It was in line with our previous expectations that this single round of talks in Islamabad could not achieve a comprehensive, balanced long-term peace agreement. A more realistic path would be to reach a phased, temporary ceasefire arrangement without further escalating military conflict, leaving room for subsequent rounds of negotiations. Throughout the negotiation process, repeated threats and gestures of goodwill are expected to continue.

Additionally, from the perspective of the critical timeline, the US is facing pressure from the War Powers Resolution (WPR).

According to legal requirements, military actions without congressional approval cannot exceed 60 days but can be extended to 90 days (including withdrawal periods). Based on this calculation, the end of April to May will be an important time node for whether US troops will withdraw. However, considering Trump’s past governing style, White House staff will likely seek other legal tools or pragmatic interpretations to bypass restrictions and maintain a military presence.

Investment Perspective: Leverage the advantage of short-term bonds, focus on the long term, and stabilize your portfolio.

In response to the rapidly changing situation in the Middle East, investors should maintain a long-term strategic asset allocation mindset while moderately capitalizing on opportunities brought by short-term market fluctuations. They should avoid excessively chasing or betting on the outcome of a single event, prioritizing stable positioning. Previous analysis has pointed out that the recent pressure on the bond market is mainly due to rising oil prices pushing up inflation expectations. However, as the market quickly adjusts, we observe that the 1-year forward OIS rate one year from now (1Y1Y OIS) has risen further, approaching the upper limit of the federal funds rate benchmark. This provides technical support for front-end bonds and shows that market concerns about US interest rate hikes have eased somewhat.

In contrast, the European and UK central banks have shifted to a more hawkish tone on rate hikes in March, whereas the Federal Reserve, tasked with the dual mandate of employment and inflation control, is exercising greater caution in policy adjustments, possessing more operational flexibility to respond gradually based on economic data rather than rushing into tightening. Although this first round of US-Iran negotiations did not bear fruit, and Trump announced a blockade of the Strait of Hormuz, triggering an oil price rebound and a rise in geopolitical risk premium, the reaction in the Asian trading session this morning was relatively restrained, with limited stock market declines, showing that the market had already anticipated this result and no panic selling occurred.

However, as mentioned earlier, uncertainties remain regarding the evolving situation, including the escalation of the strait confrontation, regional variables such as Israel and the Houthis, and the protection of America's core interests. Therefore, we recommend that investors leverage short-term bond investment logic as a core hedge: effectively managing interest rate volatility and geopolitical risks while maintaining a relatively stable income source, acting as a buffer for overall asset allocation and a foundation for long-term positioning.

Source: Left chart: JP report; Taikang Asset Management (Hong Kong), organized on March 31, 2026. Right chart: JP report; Bloomberg; Taikang Asset Management (Hong Kong), organized on April 13, 2026. Note: The Hawk-Dove Score Index is a quantitative indicator used by JP to measure and compare the extent to which central banks lean towards hawkishness (favoring interest rate hikes and tighter monetary policy) in their monetary policy statements.

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