Treasuries rose as signs of an accord to end the US-Iran conflict pushed oil prices to their lowest levels in over a month, potentially easing inflation pressures. Yields across maturities initially fell before stabilizing, with the 30-year bond yield nearing 4.98% at one point, its lowest since May 12.
The decline in oil prices followed reports from Iranian state television about an unofficial US-Iran memorandum of understanding that would restore commercial transit through the Strait of Hormuz. However, the US administration has denied these claims. The conflict, which began with a US attack on Iran in late February, disrupted Middle East oil supplies and contributed to a global inflation surge, prompting central banks, including the Federal Reserve, to consider interest rate hikes.
Jack McIntyre, portfolio manager at Brandywine Global Investment Management, noted that investors are seeking concrete signals of conflict resolution, which has led to a rally in Treasuries alongside declining oil prices. Despite higher yields, the US economy remains robust, complicating market responses to cheaper oil.
“Investors and traders are looking for something concrete on US and Iran that signals the conflict is coming to an end.”
Jack McIntyre, Portfolio Manager at Brandywine Global Investment Management
The Fed's preferred inflation gauge, the personal consumption expenditures price index, is expected to show an increase to 3.8% in April from 3.5% in March. US benchmark West Texas Intermediate crude oil futures fell below $88 a barrel, while global benchmark Brent crude breached $95, both for the first time since April 22.
Meghan Swiber, a US rates strategist at Bank of America, highlighted the challenge for the Fed in managing oil prices between $80 to $100 a barrel, as potential rate hikes could limit the steepness of the US rates curve. Recent declines in Treasury yields have been led by longer maturities, while shorter maturities remain influenced by expectations of a future rate increase.
“This sweet spot of oil settling between $80 to $100 a barrel is the tricky thing for the Fed.”
Meghan Swiber, US Rates Strategist at Bank of America
Swap contracts indicate a quarter-point rate increase by April 2027, contrasting with earlier expectations of rate cuts by the end of this year. Treasury yields have generally declined alongside oil prices since May 19, despite ongoing hostilities. Higher yields may attract investors to upcoming Treasury auctions, including a $70 billion sale of five-year notes.
Background
The ongoing US-Iran conflict has significantly impacted global oil markets and inflation, with recent developments suggesting potential de-escalation. Investors are closely monitoring the situation for concrete resolutions that could stabilize markets.
Looking ahead, market participants will be watching the Fed's upcoming decisions and the evolving US-Iran situation, as these factors will likely influence financial markets and economic conditions in the coming months.
