U.S. Treasury Yields Stay Near One-Month Lows on Iran Deal
Government bond yields across the United States and the Eurozone extended their decline on Tuesday. Investors continued to unwind the severe inflation scenarios priced into markets during the three-month U.S.-Iran conflict.
However, traders remained cautious because the preliminary peace agreement still lacks important operational details. Although the fighting has stopped, uncertainty remains over how quickly trade routes and energy supplies will return to normal.
Lower crude oil prices have reduced immediate inflation concerns. As a result, investors are also reassessing their expectations for future central bank policy.
U.S. Treasury Yield Falls to One-Month Low
The benchmark 10-year U.S. Treasury yield slipped to 4.43% by 8:00 a.m. ET, reaching its lowest level in approximately one month.
Meanwhile, the policy-sensitive two-year Treasury yield held near 4.05%. It consolidated after touching a one-week low during the previous trading session.
Shorter-term bond yields are particularly sensitive to expectations surrounding Federal Reserve interest-rate decisions. Therefore, the latest decline reflects a reduction in bets on further monetary tightening.
Fed Rate Hike Expectations Decline
The geopolitical risk premium that encouraged hawkish Federal Reserve forecasts during the war has started to fade.
According to the CME FedWatch Tool, markets now assign an implied probability of approximately 40% to a Federal Reserve rate increase in December.
During the conflict, rising oil prices had increased concerns that higher energy costs would keep inflation elevated. This encouraged investors to anticipate a more restrictive response from the Fed.
However, the preliminary U.S.-Iran agreement and falling crude prices have weakened that outlook.
German Bond Yields Reach Two-Week Lows
Eurozone government bond yields also remained under pressure.
Germany’s 10-year bond yield, which serves as the main benchmark for the Eurozone, hovered near a two-week low of 2.92%.
At the same time, the two-year German yield stood near 2.55%, also close to its lowest level in two weeks.
The two-year yield tends to move closely with expectations surrounding European Central Bank policy. Its decline suggests that traders are reconsidering whether the ECB will need to maintain an aggressively restrictive stance.
European Bonds Underperformed During the Conflict
The peace agreement places European government debt at an important turning point compared with U.S. Treasuries.
During the conflict, U.S. government bonds attracted most of the traditional safe-haven demand. European bonds, by contrast, significantly underperformed.
Investors feared that Europe would suffer more directly from a major energy supply disruption. Its reliance on imported energy left the region particularly vulnerable to rising oil and natural gas prices.
Consequently, European inflation expectations increased while traders priced in the possibility of tighter ECB monetary policy.
Eurozone Bond Recovery Depends on Central Banks
A sustained recovery in Eurozone government bonds will depend largely on how central banks respond to the recent increase in prices.
Policymakers may decide that the wartime inflation spike was temporary and largely driven by energy costs. In that case, expectations for additional interest-rate increases could continue to decline.
However, central banks could maintain a restrictive position if they believe higher prices may spread throughout the broader economy.
Lloyds Bank analysts noted that a significant gap remains between political progress and the full normalization of shipping traffic. They added that this gap appears wider than during previous periods of positive diplomatic developments.
Therefore, uncertainty surrounding energy transportation and regional logistics could continue to influence Treasury yields, Eurozone bonds and central bank expectations.
