Global bond markets surged and oil prices tumbled as investors reacted to the prospects of a US-Iran peace deal that could reopen the Strait of Hormuz, easing inflation concerns and dimming expectations for interest rate hikes. On Monday, Treasuries advanced, with two-year yields falling as much as seven basis points to 4.01% before settling around 4.07%, and benchmark 10-year notes dropping to 4.42% before ending at 4.47%. This rally extended to Europe and Asia, where yields fell as traders trimmed rate hike bets for central banks like the Bank of England and the European Central Bank. The optimism stemmed from news of an interim agreement between the United States and Iran to reopen the Strait of Hormuz, a critical passageway for approximately one-fifth of the world's oil supplies, with an official signing expected on Friday.
Oil prices reacted sharply to the news, with Brent crude sliding 5.1% to settle at $78.96 per barrel on Tuesday, dipping below $80 for the first time since early March. On Monday, Brent crude initially fell 4.7% to $83.24 a barrel and U.S. crude slid 5.5% to $80.16. Analysts, such as Tomo Kinoshita of Invesco Asset Management Japan Ltd., noted that a 10% decline in oil prices could lead to an approximate 13-basis point drop in US 10-year treasury yields. The decline in oil prices was seen as a significant factor in reducing inflationary pressures globally, leading to a "risk-on" sentiment in markets and a general improvement in risk assets, including stocks.
Attention also focused on central bank policy decisions, particularly the Federal Reserve's meeting, the first under new chairman Kevin Warsh. The Fed is widely expected to keep its benchmark rate in a range of 3.5% to 3.75%, delaying potential rate hikes amidst the easing inflation outlook. Swaps traders are now pricing in less than an 80% chance of a quarter-point Fed hike by December, with a move not fully priced in until March 2027. The European Central Bank already raised borrowing costs by a quarter point last week, while the Bank of Japan raised its interest rates to a 31-year high on Tuesday. Despite the initial market enthusiasm, some strategists, like Alyce Andres of Bloomberg's markets live, cautioned that the lack of detailed information on the US-Iran deal acts as a "floor under crude oil prices and limiting the scope for a deeper rally in treasuries" until further clarity emerges.
