U.S. Treasuries experienced a broad rally across the curve as cash trading resumed following a holiday, driven by renewed investor optimism surrounding a potential deal between the United States and Iran. This shift in sentiment led to a significant easing of yields, reflecting a market increasingly hopeful for de-escalation in the Middle East and its implications for global inflation.
Yields on the benchmark US two-year government note declined by six basis points, settling at 4.05%. Similarly, the yield on the closely watched 10-year Treasury dropped six basis points to 4.50%. Longer-dated bonds also saw gains, with 30-year yields falling four basis points to 5.03%. These movements occurred as cash trading reopened after being closed on Monday, allowing markets to price in recent developments.
The catalyst for this market reaction stemmed from President Donald Trump’s recent statements, indicating that negotiations with Iran on an interim deal to extend their ceasefire and reopen the crucial Strait of Hormuz were “proceeding nicely.” Such comments initially helped push Brent crude prices back below $100 a barrel, signaling reduced energy supply concerns. However, the delicate balance of the existing truce was underscored just hours later, when US and Israeli jets reportedly struck a number of Iranian vessels in the Strait of Hormuz, highlighting the persistent geopolitical volatility.
Despite the reported military actions, the prevailing market sentiment leaned towards the potential for a diplomatic resolution. Wee Khoon Chong, Senior APAC Market Strategist at BNY, articulated this perspective, stating, “The absence of escalation in the Middle East and the optimism towards a deal is leading to lower oil prices and inflation expectations.” Chong further elaborated on the broader economic implications, noting, “This cocktail lessens the pressure for policy tightening, which bodes well for Treasuries across the curve.”
This recent rally marks a notable reversal from earlier in the month, when US yields had surged. That earlier increase was largely attributed to the Iran war, which spurred the biggest inflation surge since 2023. At that time, traders had ramped up bets that the Federal Reserve will need to maintain higher interest rates for longer under its new chairman, Kevin Warsh, to combat rising inflationary pressures.
Bloomberg Strategists offered further insight into the evolving market dynamics. Garfield Reynolds, a Markets Live strategist, commented, “Global yields have peaked as the damage delivered to the global economy starts to overwhelm the initial inflationary impulse created by the long closure of the Strait of Hormuz.” Reynolds added a forward-looking perspective, suggesting, “With central banks also willing to hike rates in order to combat inflation, longer-dated government bonds offering the fattest yields in almost two decades are set up to rally from here.”
Following the latest developments in US-Iran talks, market participants have significantly pared back their expectations for near-term Fed tightening. Overnight-indexed swaps, a key indicator of future interest rate policy, now fully price in a rate hike by March 2027, a notable deferral from the December 2026 expectation observed at the end of last week. This adjustment reflects a recalibration of the monetary policy outlook, with less immediate pressure on the Federal Reserve to act aggressively.
The easing of hawkish Fed expectations also contributed to a rebound in the extra yield investors demand to hold 30-year bonds over five-year notes. This spread had previously fallen to its lowest level since May 2025, indicating a flattening of the yield curve often associated with tighter monetary policy expectations. Its rebound suggests a partial unwinding of those more aggressive tightening bets.
Abbas Keshvani, Director of Asia macro strategy at RBC Capital Markets in Singapore, echoed the sentiment regarding inflation and energy prices. Keshvani observed, “A large part of the bond selloff has been due to heightened inflation expectations on higher energy prices.” He concluded that progress in US-Iran talks “could lead to further reduction in energy prices, inflation expectations, and therefore yields,” reinforcing the direct link between geopolitical stability and bond market performance.
However, not all market participants align on the Fed’s future path. BlackRock Inc. is among those advocating for a different approach, arguing that the Fed may have sufficient reason to cut rather than hike rates. Navin Saigal, the firm’s Head of Global Fixed Income for Asia Pacific, stated on Bloomberg TV Monday that pressure on the labor market could justify the Fed staying on hold or even cutting rates. These comments stand in contrast to the broader investor consensus betting that Chairman Warsh will prioritize the Fed’s inflation-fighting credibility over any political pressure, such as President Trump’s push for lower rates.
The recent Treasury rally underscores the profound impact of geopolitical developments on global financial markets, particularly through their influence on energy prices and, consequently, inflation expectations. As discussions surrounding a potential US-Iran deal continue, albeit with underlying tensions, the bond market remains highly sensitive to any signals that could alter the trajectory of monetary policy and the broader economic outlook.
