Treasury yields mostly declined as investors scaled back expectations for Federal Reserve interest rate hikes following news of a potential deal to resolve the Iran conflict. Shorter-maturity bonds, which are most sensitive to monetary policy changes, led the decline in yields. Swaps traders now price in less than an 80% chance of a quarter-point Fed hike by December, with a full hike not anticipated until March 2027. Brent crude oil prices fell, alleviating inflation concerns, and the US dollar weakened, reflecting reduced demand for safe-haven assets. This optimistic market reaction stems from the possibility of the Strait of Hormuz reopening and a decline in oil prices if peace is achieved [thestar.com.my].
Despite the immediate rally, strategists urge caution, as uncertainty surrounding the US-Iran deal remains. Alyce Andres, a macro strategist at Bloomberg’s markets live, noted that while the framework is a promising first step, explicit details and technical negotiations are still pending, which is putting a floor under crude oil prices and limiting the scope for a deeper rally in treasuries. Tomo Kinoshita of Invesco Asset Management Japan Ltd. estimated that a 10% decline in oil prices, based on observed post-war correlations, could lead to an approximate 13-basis point decline in US 10-year treasury yields [thestar.com.my].
The current market sentiment contrasts with a period earlier in the year when fears of a lasting inflationary shock from the Iran conflict drove global bond yields significantly higher. For instance, before this recent rally, the 10-year U.S. Treasury note yield reached around 4.6%, its highest level in over a year, and 30-year yields, impacting mortgages, rose to a one-year high of 5.159%. At that time, markets were pricing in a roughly 50% chance of a Fed rate hike by December, a reversal from earlier expectations of rate cuts. This previous bond sell-off was attributed to rising energy prices and the anticipation of central bank interest rate hikes to combat persistent inflation [globalbankingandfinance.com].
