Treasury yields mostly advanced on Monday and Tuesday as investors recalibrated their expectations for Federal Reserve interest rate hikes. This shift was largely influenced by news of a potential peace agreement between the US and Iran, which helped ease inflation concerns as oil prices declined. On Monday, the yield on the benchmark 10-year Treasury note fell by about one basis point to 4.47%, after earlier dropping to 4.42%. Shorter maturities, most sensitive to monetary policy changes, also saw their yields decline, with two-year yields falling as much as seven basis points to 4.01% before ending around 4.07%.
Optimism surrounding a resolution to the US-Iran conflict played a significant role. The US and Iran announced an interim agreement and a roadmap toward a peace deal within 60 days, alongside Washington granting Tehran a 60-day license to sell oil internationally. This boosted expectations of increased global oil supply and subsequently led to a decline in Brent crude prices, alleviating worries about inflation. However, some strategists, like Alyce Andres of Bloomberg, cautioned that markets are likely to view this as a promising first step rather than a final resolution, which could limit a deeper rally in Treasuries.
Despite the recent decline, the US 10-year Treasury yield rose to 4.5% on Monday, reaching its highest level in about two weeks, before falling on Tuesday to 4.48%. The Federal Reserve's hawkish stance from the previous week still prompted investors to increase bets on further rate hikes this year, with markets currently pricing a 68% probability of a rate increase in September. However, Citadel Securities suggested that Federal Reserve Chairman Kevin Warsh’s commitment to lowering inflation may stabilize long-dated Treasury yields, leading to a generally lower term-premium.
The demand for U.S. Treasury bonds has also seen a shift. While the current market conversation often focuses on supply, the composition of buyers has changed significantly. In 2013, primary dealers took 54% of all Treasury coupon auctions, but so far in 2026, they've taken down just 14%. Domestic investment funds now absorb roughly 70% of issuances, and foreign buyers, particularly private transactions in US bonds and notes, have averaged over $500 billion per year since 2022. This indicates a growing presence of “yield-elastic” buyers, meaning demand is more sensitive to the prevailing yield, potentially keeping yields higher but also somewhat rangebound.
