Yields on U.S. government bonds fell on Tuesday as investors grew optimistic about a potential deal to reopen the Strait of Hormuz, easing concerns about inflation at the start of a holiday-shortened week with significant U.S. economic data releases expected.
A $69 billion auction of two-year notes showed solid investor interest, with demand at 2.64 times the notes on sale. President Donald Trump indicated progress in negotiations with Iran, although tensions remain high following U.S. defensive strikes in southern Iran.
The yield on the benchmark U.S. 10-year Treasury note fell 8.1 basis points to 4.491%, while the 30-year bond yield decreased by 5.9 basis points to 5.023%. The two-year U.S. Treasury yield, closely linked to Federal Reserve interest rate expectations, dropped 8 basis points to 4.047%.
“Markets seem to think that a deal is close at hand. As long as there's optimism around a deal, that's creating a stronger backdrop.”
Gennadiy Goldberg, head of U.S. rates strategy at TD Securities
Economic data released on Tuesday showed mixed results, with consumer confidence exceeding expectations but housing indices underperforming. Markets remained largely unmoved by the data.
U.S. and Iranian negotiators are meeting in Doha to discuss ending the three-month conflict affecting global oil markets. U.S. Secretary of State Marco Rubio suggested an agreement could be reached in a few days.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.536%. The 10-year TIPS breakeven rate indicated an expected average inflation of about 2.4% over the next decade.
Background
The ongoing conflict in the Strait of Hormuz has significantly impacted global oil markets, contributing to rising fuel costs and inflation. A resolution could stabilize markets and ease inflationary pressures.
As negotiations continue, markets are watching for developments that could impact inflation and economic stability.
