U.S. Treasury and European sovereign bond yields fell sharply on Monday after a landmark peace agreement between the United States and Iran boosted global markets.
The deal also triggered a steep decline in crude oil prices. As a result, concerns about renewed inflation began to ease, encouraging investors to return to government bonds.
U.S. Treasury Yields Drop to Multiweek Lows
The benchmark U.S. 10-year Treasury yield fell to a one-month low of 4.441%. Meanwhile, the two-year yield declined to a one-week low of 4.04%.
Short-term bond yields are especially sensitive to expectations surrounding Federal Reserve policy. Therefore, the latest decline suggests that traders are beginning to question the “higher-for-longer” interest rate outlook.
Investors may now believe that easing inflation pressures could give the Federal Reserve more flexibility to lower interest rates in the future.
U.S.-Iran Peace Deal Reopens the Strait of Hormuz
The bond market rally followed an announcement from U.S. President Donald Trump on Sunday.
Trump confirmed that a negotiated peace agreement would immediately end hostilities between Washington and Tehran. The economically important Strait of Hormuz is also expected to reopen on Friday.
Iranian Deputy Foreign Minister Gharibabadi confirmed the agreement on state television. He said the deal had been finalized and would be formally signed on Friday.
The reopening of the Strait of Hormuz could ease concerns about global energy supplies. The waterway plays a crucial role in transporting oil from the Middle East to international markets.
Federal Reserve Decision Moves Into Focus
The breakthrough comes at an important moment for the Federal Reserve.
The central bank is widely expected to leave interest rates unchanged on Wednesday. The meeting will also mark Kevin Warsh’s first policy decision since becoming Federal Reserve chair.
However, investors will closely examine the Fed’s statement and updated economic projections. Wall Street will be looking for signals about inflation, economic growth and the possible timing of future interest rate cuts.
Lower oil prices could reduce inflationary pressure and strengthen the case for monetary easing. However, the Fed may still prefer to wait for further evidence before changing policy.
European Bond Yields Follow U.S. Treasuries Lower
European government bonds also rallied as geopolitical risks eased.
Germany’s 10-year Bund yield, the main benchmark for the Eurozone, fell to a two-week low of 2.955%.
The German two-year yield, which closely reflects European Central Bank policy expectations, also declined. It traded near a two-week low of 2.56%.
British government bonds attracted fresh demand as well. The United Kingdom’s 10-year gilt yield dropped to 4.779%, its lowest level since mid-April.
Italy’s 10-year government bond yield also reached a two-week low.
Falling Oil Prices Ease Inflation Concerns
The decline in global bond yields reflects the removal of part of the geopolitical risk premium that had affected fixed-income markets during the conflict.
At the height of the tensions, two-year European yields climbed close to their highest levels in almost two years. The 10-year benchmark also reached levels not seen since 2011.
Investors had feared that disruptions to energy supplies would create a stagflationary shock. Such a scenario would combine high inflation with weak economic growth.
However, crude oil prices fell sharply after news of the peace agreement. The prospect of lower energy costs encouraged investors to buy European sovereign bonds.
Before the agreement, restrictions affecting the Strait of Hormuz and rapidly rising energy prices had increased fears of another inflation surge. Those concerns eventually contributed to the European Central Bank’s first interest rate increase since 2023.
The peace agreement has now changed the market outlook. Lower crude prices could reduce inflation pressure, weaken expectations for aggressive monetary tightening and support further demand for government bonds.
