(Bloomberg) — Treasuries gained along with lower oil prices as the prospect of Middle East diplomacy helped drive rallies for most major government debt markets.
The advance pushed US yields on Wednesday lower by two to four basis points across maturities, as the White House said that peace talks were ongoing with Iran. The gains broadly held even after Tehran rejected a ceasefire and demand was weak for the second of this week’s three longer-term debt auctions. US benchmark crude oil also pared a drop of more than 6% to less than 2%.
Since the US attacked Iran Feb. 28, yields have been guided by oil prices, which surged as Middle East supply was curtailed and have pushed up gasoline prices that factor into US inflation gauges. The prospect of higher inflation readings wiped out expectations for Federal Reserve interest-rate cuts this year and began to build the case for a rate increase. Occasional daily declines in oil prices this month, such as Wednesday’s, have benefited Treasuries.
“Looking at futures markets, we are still pricing in odds of Fed hikes this year,” Molly Brooks, rates strategist at TD Securities. “So it seems we are holding off and waiting on an agreement before pricing out hikes.”
The $70 billion five-year note auction — like Tuesday’s sale of two-year notes — was awarded at a higher-than-expected yield indicative of low investor interest. The five-year auction metrics were better than for the two-year overall, however, and the overall mood in markets remained positive.
European government bonds rallied on hopes for a deescalation, with yields on two-year German notes falling as much as 10 basis points to 2.57%, while those on UK peers slumped as much as 11 basis points to 4.36%. The Treasury will sell $44 billion of seven-year notes on Thursday.
–With assistance from Edward Bolingbroke.
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