(Bloomberg) — Treasuries rose as the latest signs of an accord to end the US-Iran war sent benchmark oil prices to their lowest levels in more than a month, offering potential relief from sustained high inflation.
Yields across maturities reached their lowest levels in more than a week before rebounding to little-changed levels. The 30-year bond’s yield, which has closed above 5% every day since May 12, approached 4.98% at one point.
Those levels were reached as oil prices fell after Iranian state television said an unofficial draft US-Iran memorandum of understanding would allow restored commercial transit shipping through the Strait of Hormuz. The US administration said the report was false.
The US attack on Iran in late February disrupted Middle East oil supplies, igniting a price surge that has fueled inflation globally. Central banks including the Federal Reserve are expected to raise interest rates in response.
Investors and traders are “looking for something concrete on US and Iran that signals the conflict is coming to an end,” pointing to “a rally in Treasuries along with the decline in oil prices,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management.
At the same time, he said, apart from the housing market, the US economy “is doing well and not meaningfully slowing down” in the face of higher yields, complicating the market’s response to cheaper oil.
The Fed’s preferred inflation gauge — the personal consumption expenditures price index — is due Thursday. The PCE price index rose 3.5% from a year earlier in March, and economists anticipate an increase to 3.8% in April. The Fed aims for a long-run rate of 2%.
US benchmark West Texas Intermediate crude oil futures fell below $88 a barrel, and global benchmark Brent crude breached $95, both for the first time since April 22.
“This sweet spot of oil settling between $80 to $100 a barrel is the tricky thing for the Fed,” Meghan Swiber, a US rates strategist at Bank of America, told Bloomberg Television Wednesday. The prospect of Fed rate hikes that tighten financial conditions “can really cap how steep the US rates curve can get.”
Broad declines for Treasury yields in recent weeks have been led by longer-maturity tenors, as shorter-maturity ones more closely tied to the Fed’s rate have been undergirded by expectations for a rate increase at some point in the next 12 months.
Swap contracts whose rates amount to expectations for what the Fed’s rate will be in the future show that a quarter-point rate increase is viewed as certain by April 2027. Before the oil price surge, the contracts carried rates indicating at least two quarter-point rate cuts were likely by the end of this year.
Treasury yields have broadly declined alongside oil prices since May 19 amid reports of progress toward ending the conflict, even as hostilities continued. However the May yield highs included the highest 30-year yield since 2007, while shorter maturities reached the highest levels in more than a year.
Higher yields may attract investors to Treasury auctions, including a $70 billion sale of five-year notes at 1 p.m. New York time. A two-year note auction on Tuesday drew good demand despite a rally into the bidding deadline that trimmed its yield by about five basis points. The 4.071% auction result was the highest since February 2025.
–With assistance from Carter Johnson.
(Adds investor comment and US response to Iran state television report and updates yield levels.)
More stories like this are available on bloomberg.com
