(Bloomberg) — Treasuries gained to wrap up a choppy week of war-driven swings, as easing tensions in the Middle East drove oil lower and prompted traders to boost wagers that the Federal Reserve will cut interest rates this year.
The rally, which pushed yields to their lowest levels in a month, followed Tehran’s pledge to reopen the Strait of Hormuz amid a ceasefire between Israel and Hezbollah, bolstering optimism around broader de-escalation. Brent crude fell below $90 a barrel, stocks rallied and European bond yields declined, mirroring the move in Treasuries.
“It’s all positive news out of the Gulf with the Strait of Hormuz being opened,” said Tom di Galoma, managing director at Mischler Financial Group. “The majority of market participants do not think the war is over but headlines suggest there is good reason to be hopeful.”
The moves capped a mixed week for the $31 trillion market, with yields following moves in energy prices as investors parsed headlines around developments from the conflict. The benchmark 10-year yield closed at 4.24%, down from 4.32% a week earlier.
“As goes crude, so go rates — it’s about as simple as that,” said Brij Khurana, a portfolio manager at Wellington Management. Lower oil prices are feeding into softer inflation expectations, while improved sentiment is supporting demand for government bonds, he said, adding yields may “drift lower into the summer.”
The session saw the two-year yield fall below the Fed’s 3.75% upper bound, touching its lowest intraday level since March 18. The front-end rally coincided with traders pricing in about 16 basis points of easing for the December Fed meeting in swaps, up from roughly 8 basis points at Thursday’s close.
Speaking Friday, Fed Governor Christopher Waller said policymakers may need to stay on hold for a prolonged time “if the risks to inflation outweigh those to the labor market,” due to the energy shock triggered by war in Iran. They’re next scheduled to meet April 28-29.
Waller voted to keep policy steady at 3.5% – 3.75% at last month’s meeting after having voted for a quarter-point rate cut in January. Waller was on the shortlist of candidates to replace current chair Jerome Powell. President Donald Trump ultimately nominated Kevin Warsh.
Some investors are also cautioning that sticky inflation and resilient economic data could keep the Fed on hold for longer, potentially limiting how far yields can fall even as geopolitical risks recede.
“This shows just how sensitive the market has been to headlines surrounding Middle East uncertainty,” said Gennadiy Goldberg, head of US interest rate strategy at TD Securities. “Many investors will remain sidelined to ensure that the progress is durable and doesn’t reverse over the weekend.”
What Bloomberg Strategists say…
“Two-year Treasury yields look ready to fall back below the effective fed funds rate because the market is moving away from pricing an oil shock and back toward pricing a shallow Fed cutting cycle.”
—Michael Ball, Macro Strategist, Markets Live
For the full analysis, click here.
The Treasuries rally on Friday reverberated across global bond markets, where investors pared bets on how much central banks would raise rates and re-embraced the view that lower energy prices would ease pressures on inflation.
“For stock and bond market bulls around the world, this is the perfect end to the week,” said Kathleen Brooks, research director at XTB. “It brightens the outlook for the global economy.”
Looking into next week, investors await testimony from a Senate committee hearing with Warsh as he seeks approval to lead the Fed when Powell’s term expires in May.
Before he was nominated, Warsh supported lowering rates, arguing rising productivity should result in a neutral policy rate below current estimates around 3.1%. During his term as a Fed governor from 2006 to 2011, Warsh was an inflation hawk, and the bond market will focus on how he makes a case for easing when inflation remains above the central bank’s target.
Brian Quigley, senior portfolio manager at Vanguard, said they expect a balanced message from Warsh that highlights how “central banks in general are really supposed to be looking through the temporary impacts of a supply shock.”
Warsh will “want to indicate in some way he’s balanced and not a perma-dove,” he said.
–With assistance from Greg Ritchie and Edward Bolingbroke.
(Adds Waller remarks, Warsh testimony and investor quote, updates prices.)
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