Could a Railway Change the Price of War?

Since February 2026, the conflict in the Middle East has been a focal issue for global markets, disrupting flights, threatening oil exports and sending shocks across the world. For the last two weeks, a continued ceasefire in the region seemed like it could actually happen – that optimism proved short-lived. Tehran attacked US vessels again and in retaliation, the US has fired missiles at Tehran. This reignition poses a tumultuous threat to regional security in the Middle East, with Tehran declaring the Strait of Hormuz closed and the US refusing said closure.

So, what does this mean for bond markets? As expected, there has been inflationary pressure driven by oil prices which are over $86 per barrel, up 4.40% in the last month and 26.40% in the last 12 months. In response, US Treasury yields across the curve have jumped up, notably the 10-year is up 11bps to 4.58%. Every tanker that doesn’t leave a port or cannot cross the Strait leads to constrained supply, so oil becomes a scarcer resource leading to higher inflation and thus, investors demand higher yields to compensate for rising inflation risk, reflecting the sentiment that central banks may keep interest rates higher for longer. So, bond yields are rising, stocks are falling, and investors are driven to inflation hedges such as gold.

But perhaps the biggest development isn’t happening in Tehran, but in a fishing town most people can’t place on a map: Fujairah. DP World may not have solved the Hormuz problem, but it has proposed one of the most credible attempts yet to make the Strait matter less. The Dubai-based company is in talks to build a new port and container terminal near Fujairah, outside of the Strait entirely on the Gulf of Oman, feeding cargo from a high-speed rail link to Dubai and Abu Dhabi. The new project has yet to be finalised but senior officials within the company believe this rail could be constructed within 18 months once receiving approval. The point is not to replace Hormuz but ensure the UAE has an alternative that doesn’t depend on 21 miles of contested water.

Currently, Fujairah is predominantly a container hub rather than a crude oil terminal, so it does not directly substitute oil tankers transiting Hormuz, but the logic is identical: reduce dependence on a single bottleneck. For example, the UAE built its own pipeline (Habshan-Fujairah) several years ago for this exact reason, so that oil exports wouldn’t live or die by this single point, bypassing the Strait altogether. The proposed rail simply extends the same principle to the wider economy, allowing more trade. During the recent tensions, the Jebel Ali port reportedly saw container volumes fall from 40,000 per day to 1,000 once Tehran started making good on its threats: a 97% collapse. Inflation risk isn't solely driven by oil; disruptions to broader trade flows can also push up prices. For bond investors, that makes redundancy an economic asset, not just a logistical one.

For bond investors, the significance isn't the railway or the port themselves, it is what it does to inflation expectations. The less vulnerable global markets become to a single passageway, the smaller the inflation premium investors need to price into long-term government bonds – the less violently yields should react next time Tehran makes a threat. If this thesis holds, it’s an argument for long-duration Treasuries looking less like a losing bet.

Suppose it is built, will markets finally stop fearing Hormuz headlines like an impending oil shock? Would the US and Iran be able to continue without dragging the rest of the world into it every time?

Of course, a railway is hardly immune to conflict. In an all-out regional war, it could itself become a target. But the objective is not to create an indestructible export route, it is redundancy. Markets don’t need perfection but alternative options. Every additional route through which oil and trade can flow lowers the odds of severe supply shocks, and therefore, the inflation premium embedded in long-term bonds.

Allow me to paint the picture, it is 2036, Iran announces to its citizens that it is “two months away from enriching weapons-grade uranium,” adding that it will be used for “peaceful purposes” like clean energy and medical research and “certainly never used to attack Isr-.” A phrase that, thanks to Sacha Baron Cohen, has long since escaped the world of satire. Several days later, there are growing hostilities in the Gulf, and Tehran threatens to close the Strait. Ten years earlier, that sentence would have sent Brent crude higher, inflation expectations rising and Treasury yields climbing as investors run to price in another global energy shock. This time, they hardly blink, not because the Middle East is peaceful but because the world’s dependence on one 21-mile stretch of water has diminished and the Gulf’s exports are no longer so vulnerable. Inflation expectations remain anchored, Treasury yields hardly move and bond markets finally see Hormuz headlines as a regional security event rather than a global inflation shock.

So, can a rail actually reduce the economic cost of war? If DP World is indeed successful with their project and can divert even a fraction of Gulf trade away from Hormuz through the new Fujairah corridor, I don’t think the IRGC will show up to their doorstep with flowers and an apology letter. But the next time the Hormuz closes, it will not move markets the way it does today. If infrastructure can reduce those consequences, it can also reduce the inflation premium embedded in bonds. DP World’s proposal isn’t about building a railway but weakening one of geopolitics’ most powerful transition mechanisms – and that is the takeaway that matters.