Introducing the 'NACHO' trade: How Wall Street is betting on higher oil prices and persistent inflation

By Joseph Adinolfi

The spread between short- and long-term bond yields has compressed, while oil prices have remained near $100 a barrel

The "NACHO" trade has helped push Treasury yields higher recently, even though they declined this week.

Wall Street is glomming on to yet another acronym inspired in part by Mexican cuisine.

Roughly one year after the acronym "TACO" - which stands for "Trump always chickens out" - went from being a viral joke to a serious moneymaker, traders and strategists across Wall Street have started to toss around "NACHO," or: "Not a chance Hormuz opens." Nobel Prize-winning economist Paul Krugman referenced the acronym in a recent Substack post.

"I never bought into the TACO meme, which was initially about tariffs: Trump did not, in fact, reverse his destructive tariff policy, although he blinked in his confrontation with China," Krugman wrote. "But NACHO looks right. Hormuz won't open until the economic damage from its closure becomes much more severe."

Wall Street strategists and trading desks have also referenced NACHO in commentary shared with MarketWatch.

TACO vs. NACHO

Some might say that the "TACO trade" has helped to push major U.S. equity indexes back in record territory - although equity investors have found plenty of other positives to focus on.

Corporate credit spreads have also remained relatively calm, despite simmering worries about underwriting standards in the adjacent private-credit space.

But in bond and commodity markets, the "NACHO trade" is king. Treasury yields have pushed higher, and interest-rate derivatives have started to price in a higher chance of an interest-rate hike late next year. At the very least, traders seem to have given up on the two rate cuts for 2026 that they had been expecting earlier this year.

Market-based indicators of long-term inflation expectations - like the spread between yields on traditional Treasury bonds and Treasury inflation-protected securities - have also signaled that expectations for persistent inflation are rising.

The Treasury yield curve has compressed as a result, mirroring a dynamic that investors witnessed in 2022. Back then, the Federal Reserve was aggressively hiking interest rates to combat a wave of inflation. The result was a selloff in both stocks and bonds that hammered investors.

The spread between yields on the 2-year Treasury note BX:TMUBMUSD02Y and the 30-year Treasury bond BX:TMUBMUSD30Y has fallen by more than 20 basis points (0.2 percentage points) since the end of February, according to Dow Jones Market Data.

NACHO's influence can also be seen in commodity markets, where crude-oil prices (CL00) (BRN00) have continued to trade around $100 a barrel, according to FactSet data - reflecting the notion that traders expect the Strait of Hormuz to remain closed for the foreseeable future.

See: Why crude prices won't fall back to levels seen before the Iran war anytime soon.

"Oil markets aren't pricing in a deal happening; the bond market isn't pricing that at all. Equities are either pricing in that a deal is happening, or that it doesn't matter whether it does or not - probably a little bit of both," said Mark Hackett, chief market strategist at Nationwide, during an interview with MarketWatch.

"The TACO trade and NACHO trade are playing out simultaneously in [the second quarter] as high energy prices have not hindered a rebound in the S&P 500 to fresh [all-time highs]," wrote a team of gold strategists at State Street Investment Management, in commentary shared with MarketWatch.

Staying power

A strong first-quarter earnings season has helped stocks resist the pull of the NACHO trade, while Wall Street analysts scramble to raise their earnings forecasts for 2026 and beyond.

As Hackett noted, investors are betting that the latest oil-price shock won't stop corporate earnings from soaring this year. The massive AI-infrastructure buildout is helping to lift shares of semiconductor companies and industrial firms, in addition to members of the "Magnificent Seven" megacap tech stocks.

But while AI-related spending has been one factor lifting expectations for GDP growth in 2026, Hackett rattled off a few other one-time boosts that could help keep the U.S. economy buoyant.

"You have the AI capex cycle, [the] One Big Beautiful Bill lifting consumers, you got the Fed moving from [quantitative tightening] to [quantitative easing], you have the tariffs - when's the last time you heard the word tariff? Not only do we have a lower effective tariff rate, but there's also the [tariff] refunds coming," Hackett said.

"Then on top of that, you have the World Cup and the 250th anniversary [of the Declaration of Independence]," he added.

Friday's April jobs report, which showed the U.S. economy created 115,000 jobs last month - far more than economists had anticipated - was just the latest example.

While consumers have continued to grapple with inflation, wage growth has continued to outpace the rise in consumer prices, Hackett pointed out. Most key economic data points, from weekly readings on applications for jobless benefits to surveys of manufacturing activity, are moving in the right direction, he noted.

U.S. stocks finished higher on Friday, cementing a sixth straight week in the green for the S&P 500 SPX and Nasdaq composite COMP, FactSet data showed.

-Joseph Adinolfi

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05-10-26 1620ET