Possible Outcomes for a Ceasefire to Peace Deal with Iran

Almost on script, after weeks of attacks against their military, leadership and some civilian
infrastructure, Iran agreed to a ceasefire with the US and Israel. Within hours they began
to claim their adversaries had violated the terms of the agreement in response to Israeli
attacks against Hezbollah in Lebanon. The Straits were briefly opened but then closed
again, as Iran began to hedge, using the violence by Israel as a reason. At best the
ceasefire is on shaky ground.

The attacks have clearly taken a toll on Iran’s ability to strike the US, Israel and their
neighbors. The percentages of capabilities destroyed range from 80% to 95% without
clarity on the numbers of items, just the percentages. If 95% of 100 mines were destroyed
that is a far different number remaining than 5% of 10,000 remaining. In any event, the
devastation and loss of leadership in the Iranian Republican Guard Corp (IRGC) rocked
Iran’s military and political structure. Command and control of their forces from Milita to
regular ground forces, their ability to organize drone and ballistic missile strikes and
control any remnants of their Navy and Air Force are minimal at best. IRGC leadership is
grasping for a way to halt the attacks, gain time to assess their options, and potentially
replenish their offensive and defensive capabilities.

Although technically open, the strait is only seeing a small fraction of the normal traffic
flow. This is due in part to uncertainty of what “open” means. Iran’s claims of ceasefire
violations could rapidly justify more attacks against shipping if it falls apart, and there are
strong rumors of an Iranian tax of $2 million per ship transiting the strait. The Financial
Times quoted Hamid Hosseini, spokesperson for Iran’s Oil, Gas and Petrochemical
Products Exporters’ Union, that Iran will demand toll payments in cryptocurrency during
the two-week ceasefire. The International Maritime Organization (IMO), an agency of the
United Nations, said there is no international agreement where tolls can be charged for
transiting international straits. “Any such toll will set a dangerous precedent,”                                    an IMO spokesperson said Thursday. Other western leaders have agreed on the illegality of this
move, which is unlikely to stop Iran if they attempt to blackmail shipping lines with threats
of attacks.

Iran will most likely keep sending mixed and conflicting signals from various sources, a
tried-and-true tactic in the middle east, as they attempt to hold off further attacks while
reexamining their options and attempting to develop backing among their few supporters
like China and Russia. The White House has not held back judgement of these
actions. President Trump has clearly stated that any tolls would be unacceptable, and that
the regime has not “done a very good job” of re-opening the strait to normal traffic. The US
has stopped short of declaring Iran has broken the ceasefire, indicating their strong desire
for the talks to have a chance to produce a favorable outcome on their goals.

As these events continued to unfold, Vice President Vance joined Witkoff and Kushner’s
negotiation team in Pakistan. Vance’s selection is probably intended to indicate the US is
serious about reaching a deal, despite Vance’s thin resume (Public Affairs officer in the
USMC and 2 years in the Senate) and lack of diplomatic experience. This was a major
moment for Vance, who presumedly wants success to support his own future in politics.
Moving from Trump’s attack dog against Europe to a substantive diplomatic role in
negotiations with an intractable enemy is not an easy step even for an experienced
diplomat. Vance’s views are grounded in years of study, but not in actual experience. His
outbursts over the past year indicate someone who has low regard for his audience.

On the other side of the table was an experienced Iranian delegation. According to
Pakistan’s Ministry of Foreign Affairs, Iran’s delegation, led by Parliament Speaker
Mohammad Bagher Qalibaf accompanied by Foreign Minister Abbas Araghchi, arrived in
Islamabad Friday to participate in the talks. The Iranian’s likely attempted to stall,
obfuscate the issues and gain more time for their leadership to consolidate their losses
and re-invigorate some partial military capability to present a credible threat to shipping
and their neighbors when talks eventually failed. Iran likely did not count on the US
delegation being as aggressive on their “red lines” and forcing discussions on items the
Iranian delegation was hoping to delay, at least for a week, to gain time. Iran wanted to
delay discussing the nuclear program for as long as possible so they can reconstitute their
forces.

The talks failed for a very few reasons. First, Iran underestimated Trump’s guidance to the
team. This plays to Trump’s strengths, negotiation and deal making, and he likely ran the
sequence of events in his mind prior to giving the team its marching orders. Iran says its
peace plan must include Washington’s “acceptance of enrichment” of uranium for Tehran’s
nuclear program. President Trump has said that is a non-starter, while Pete Hegseth has
said if they do not give up the material, the US will conduct additional strikes.

The Naval Blockade is a smart move, making a strong statement without the carnage of
additional bombing. This will buy some diplomatic time but not be a decisive factor in
Iran’s decision. The US options are still few. One would be to accept an Iranian enrichment
program in a reduced form. This is unlikely because it would cause Trump considerable
embarrassment as well as call into question his leadership for sacrificing so much for so
little. Another option would be a resumption of strikes after the blockade, to continue to
destabilize the regime, further reduce their military capabilities, and continue to hit
enrichment facilities and storage…delaying a resumption of the program at best. Also
discussed in the media, is a ground incursion.

An invasion of Iran would require 500,000 to 700,000+ troops and take months to reach
Tehran at a cost of many hundreds of lives. The terrain is extremely rough and favors the
defense. An invasion force would need thousands of vehicles to move forces through the
mountain passes and valleys. This force would exceed the numbers used for both Iraq in
2004 and Afghanistan in size and scope. A more limited attack, centered on Bandar Abas
(near the nexus of the Strait) could require control of an area of a 100 miles radius and
require from 150,000 to 300,000 troops. These forces would need a dedicated plan to cut
off supplies and control infrastructure feeding defenders from North and West proveniences.
This approach would not only make US soldiers static targets but also would put the US in
the position of accepting hundreds of thousands of refugees. These refugees would require
housing, food and water, and security both to protect them as well as to ensure they did not
harbor terrorist actors who would attack their US benefactors. Planners in the Pentagon
know the limitations of such an invasion, the primary one being that a limited incursion
would not stop longer range missiles from threatening shipping through the strait. It may
allow the US to take some oil (verifying decades of Arab fears) but could not guarantee the
strait would be free from attack.

For the war to end on conditions favorable to the US, Iran must be convinced their nuclear
program is not worth the price they will pay if the US resumes attacks against their physical
capabilities and leadership. As long as they think they can hold on, stretch out the talks and
gain international support to force the US to end the conflict, they will not accept any peace
plan. If Iran comes back to the table, there may be hope for a deal yet.

The Rethink
It has been quite a challenging start to the year. First, questions around Artificial
Intelligence and return on investment. This followed by the Supreme Court tariff ruling.
Questions about private credit. And now the events in the Middle East. In some ways akin to
the beginning of 2025 but this pocket of time is more complex.

These windows happen. Overall indices remain well above levels from early 2025. But
investors are nervous. When you hit periods of time like this, witness outsize moves in
markets, you look under the hood. Good risk managers do because you have no choice.
That is not to suggest all is bad, but you never know what you will find.

Rates
The bigger volatility has been abroad. And rightly so. The swings have been strong and
there are questions around what this means for policy. In the United States, we remain in
the range for the US 10-year. We think it continues to make sense watching US 10-year
yields closely.

 

 

Correlations
This is an interesting one. Higher oil, higher rates. Higher oil, lower rates. Our core belief is
that this will come out of growth the longer oil prices remain high. We believe the consumer
is already being taxed and this will not help. So, although the headline inflation numbers are
likely to be higher, growth will suffer too. And markets are trying to figure this out. It is going
to take more time.

 

1-year Inflation Breakeven rates. More volatility ahead.

 

Central Bank Policy
We have been firmly of the opinion that higher formal rates are not the answer here.
Relative to the chart above the Fed will watch longer-term inflation expectations. For now,
markets predict this will pass. And we believe it will in time. Overall, we still believe a lower
rate structure is needed in the United States. But for now, the Fed on hold makes sense and
the ability to move Kenin Warsh forward is particularly important. Markets do not need more
unknown variables.

The Economy
We still believe the economy is in decent shape. Granted, the longer oil prices remain high
to higher risks remain. It really comes down to the job market, and the most recent report
was constructive. The administration is aiming to re-privatize the domestic economy.
Whether you agree with it or not it takes time. The economy did very well under the
President’s first term. Even Chair Powell acknowledged it back then. Are there different
variables this time around? The answer is yes. But we remain optimistic cognizant of risk
factors. Between the shutdown and travel distortions and volatility in energy the economic
data will be tough to ascertain in the coming months.

The Outlook
Long term investors look for opportunities in times like these. Issuers have already adapted
to the new rate structure. Investment Grade OAS spreads remain low. Deal, no deal. This is
a process. It will pass. It is a near-term distraction, but the bigger picture is what matters.
We have favored adding duration with yield concessions in the UST 10-year. It remains the
global benchmark. With the Fed on hold, we will remain vigilant on this part of the US curve
moving forward

 

About Michael Snodgrass

 

Michael Snodgrass retired from the U.S. Air Force as a Major General in 2011. He is
currently the President of SG Strategic Solutions LLC.

He has extensive command and leadership experience in the U.S. Air Force and joint
world, as well as a wide range of disciplines, including defense and aerospace, technology
development, government acquisitions and requirements, foreign military sales and
leadership coaching.

He consults with the government, defense industry and other businesses on a wide range
of topics. In 2019 he became an adjunct contract professor supporting the U.S. Air Force
on strategy and policy development.

From 2014 to 2016 he was Vice President, International Business Development at
Raytheon Corp. Prior to that he was Director of U.S. Air Force and Federal Aviation
Administration programs at Engility Corp.

General Snodgrass joined Burdeshaw and Associates in 2012 and is a Senior Consultant
for numerous clients in the defense and aerospace sectors.
Prior to his retirement, he was U.S. Air Force Assistant Deputy Under Secretary for
International Affairs; responsible for formulating and executing USAF Policy, Strategy and
Programs for Building Partnerships and integrating Air Force policy with international
partner goals, totaling over $40 billion total program value.

From 2007 to 2010 he served as the first Chief of Staff, U.S. Africa Command. There, he
was responsible for the construction of the country’s newest Unified Geographic Command.

He has commanded at the squadron, group and wing levels and has lived in/visited over 50
nations while in uniform. He has over 3500 flight hours in various aircraft including                          the F-16, F-15, F-4, C-130 and HH-60, as well as over 100 combat missions in Operation Desert Storm.

In addition, General Snodgrass teaches leadership and management courses. In his spare
time, he provides leadership coaching and training to the U.S. Air Force ROTC unit at
Florida State University.

 

About Gregory Faranello

 

Gregory Faranello has 25 years of experience in the financial services industry, which has
been centered around fixed income with a core expertise in the trading, distribution and
business development of global interest rates.

Prior to working at AmeriVet, Mr. Faranello served as Head of Rates for Roberts & Ryan
Investments, Inc.

His career began as a fixed income derivative analyst with Credit Suisse, Merrill Lynch and
Goldman Sachs.

Following Goldman Sachs, Mr. Faranello moved to the buy-side as an assistant portfolio
manager on the international bond desk with Deutsche Bank Asset Management.

In a move back to the sell-side, Mr. Faranello filled leadership roles as Managing Director
and FICC management member for RBS Greenwich Capital, WestLB, Espirito Santo, and
RBC serving as head trader and risk manager responsible for the build-out and
development of several trading desks.

Mr. Faranello attended the U.S. Military Academy at West Point and later earned his
bachelor’s and master’s degree in business administration from Hofstra University in
banking, finance and international business.

Mr. Faranello is a CFA Charterholder and member of the CFA Institute, NYSSA, Money
Marketeers of NYU, and has served on the Dean’s Advisory Board of Hofstra University’s
Zarb School since 2012.

Additionally, he is registered with his FINRA Series 7 and 63