The U.S. bond market displayed a rare divergence on Tuesday, reflecting a significant split in investor views on short-term versus long-term inflation prospects. Market expectations for inflation over the next two years have risen notably, while long-term inflation expectations have remained stable. This split suggests that investors broadly view the inflationary pressures stemming from the Iran conflict as temporary, while maintaining confidence in the Federal Reserve's ability to control inflation over the long run. This dynamic is visible in inflation breakeven rates. Data show that two-year inflation expectations are now significantly higher than ten-year expectations. On Tuesday, the two-year breakeven inflation rate was approximately 3.3%, compared to about 2.36% for the ten-year rate. The gap of nearly 0.94 percentage points is more than three times the five-year average and approaches levels seen during the peak of inflation fears a year ago. Analysts note that this pattern of rising short-term inflation expectations alongside anchored long-term expectations highlights a relatively rational market assessment of the current conflict's impact. Cameron Dawson, Chief Investment Officer at NewEdge Wealth, stated that a clear "short-term vs. long-term inflation expectation gap" is present in the market. Before the COVID-19 pandemic, the opposite was typically true, with markets expecting higher long-term inflation. Such structural divergences are historically uncommon. Gina Martin Adams, Chief Market Strategist at HB Wealth, pointed out that the U.S. is experiencing its second inflation scare in the past five years, with the previous similar situation occurring during the Russia-Ukraine conflict. This frequency has been extremely rare since the high-inflation era of the 1970s. Based on market pricing, investors anticipate U.S. inflation could approach 4% in the coming quarters. Padhraic Garvey, Head of Americas Research at ING, believes this expectation reflects the significant boost to short-term inflation from rising energy prices. Despite this, long-term inflation expectations have held steady, indicating that market trust in the Fed's policy framework remains. Data show that since the outbreak of the Iran conflict, the ten-year inflation expectation has risen only slightly by about 0.10 percentage points, while the two-year expectation has surged nearly 0.48 percentage points. Analysts suggest that if the market were truly concerned that policy pressure would force the Fed to cut rates excessively, leading to persistent high inflation, long-term expectations would be unlikely to remain so stable. However, significant uncertainty remains regarding the near-term policy path. As inflation expectations have risen, investor bets on a Fed rate cut at the April meeting have virtually disappeared. According to the CME Group's FedWatch tool, approximately 97.4% of market participants now expect the Fed to hold rates steady, with only a minority betting on a rate hike. Meanwhile, if persistently high oil prices continue to suppress consumer spending and corporate hiring, potentially slowing the economy or even triggering a recession, the market still sees room for future rate cuts. Analysts indicate that in such a scenario, the Fed could be compelled to pivot back toward an easing policy.