US bond markets largely advanced, with Treasury yields falling across most tenors, particularly shorter maturities, reflecting reduced expectations for Federal Reserve interest rate hikes. This followed news of an interim agreement between the US and Iran to reopen the Strait of Hormuz, a critical channel for global oil supplies. 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. Yields on two-year Treasury notes fell as much as seven basis points to 4.01% before settling around 4.07%, while benchmark 10-year notes saw yields drop about one basis point to 4.47%.
Oil prices significantly declined due to optimism surrounding the US-Iran deal, reaching a three-month low. Brent crude fell to $80 per barrel, down from over $100 a few weeks prior, with some reports showing it dipped as low as $78.69 a barrel. A 10% decline in oil prices could lead to an approximate 13-basis point decline in US 10-year Treasury yields, according to Tomo Kinoshita, global market strategist at Invesco Asset Management Japan Ltd. The agreement's potential to ease energy price shocks contributed to falling yields across European and Asian bond markets as well.
Despite the initial market rally, some caution tempered the optimism. Analysts like Alyce Andres of Bloomberg’s markets live noted that markets view the framework as a crucial first step rather than a final resolution, and significant hurdles, including Iran's nuclear program, remain. Westpac analysts also highlighted that while the deal is a diplomatic breakthrough, its durability will likely be tested, and rebuilding confidence for transit through the Strait of Hormuz could take weeks. This uncertainty helped put a floor under crude oil prices and limited a deeper rally in Treasuries.
The US dollar fell as appetite for safe-haven assets decreased amid the peace prospects, with a Bloomberg gauge of the dollar showing a 1.4% decline. European and Asian central banks also made moves, with the Bank of Japan raising its benchmark interest rate to 1%, its highest in three decades, and the European Central Bank increasing borrowing costs by a quarter point. The Federal Reserve, under new Chair Kevin Warsh, began its meeting with expectations to leave its main interest rate unchanged.
