(Bloomberg) — US Treasuries advanced after President Donald Trump said Iranian officials were seeking an agreement on terms to end the war, triggering a pullback in oil prices and a drop in the dollar.
The moves pushed yields on Monday lower by one to two basis points across maturities, with those on the benchmark 10-year down to 4.30%. They’d touch 4.36% earlier in the session, tracking European rates higher, after negotiations collapsed between the US and Iran over the weekend and Trump said he’d blockade the Strait of Hormuz.
US money-market traders, meanwhile, are clinging to bets that the Federal Reserve will resume cutting interest rates by year-end.
“With signs of continued disruption around the Strait of Hormuz — and last week’s hard data showing higher energy costs feeding into US inflation — the bond market remains cautious in its expectations of a Fed rate cut this year,” said Dhiraj Narula, US Rates Strategist at HSBC Securities (USA) Inc.
Treasury yields across maturities have been broadly tracking the direction of oil prices since the war began at the end of February. In Monday afternoon trading in New York, they declined as oil prices retreated from intraday highs. US benchmark West Texas Intermediate crude oil futures settled near $99 a barrel, 2.6% higher on the day, versus session highs above $105.
The risk that higher fuel costs will drive up inflation, delaying Fed rate cuts, is front of mind for investors in the $31 trillion Treasuries complex. Late last week, consumer prices data for in March showed the biggest monthly increase since 2022.
The Fed lowered rates three times last year, then paused amid indications of stabilization in the labor market. Since the US attacked Iran on Feb. 28, traders have recalibrated their expectations for the next move, going from pricing in more than two reductions to briefly betting on a hike. Now, swaps linked to the Fed meeting in December price in about seven basis points of easing, or about 28% of a quarter-point cut. They fully price in a cut during the second half of 2027.
At the same time, flows in Treasury options featured a large buyer of May contracts that would benefit should 10-year yields decline to around 4.1%, a level last seen March 10.
“Market reaction in rates has been very contained,” with last week’s ceasefire agreement limiting the rise in yields, said Pooja Kumra, senior UK and European rates strategist at Toronto Dominion Bank.
–With assistance from Elizabeth Stanton.
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