Following the announcement of a preliminary peace agreement between Washington and Tehran, markets quickly adjusted their assessments of inflation and interest rate trajectories. On Monday, U.S. Treasury yields generally declined as investors bet that pressure on energy prices may ease, reducing the likelihood of further Fed tightening in the near term.
The 10-year and 2-year yields moved lower in tandem.
The yield on the 10-year U.S. Treasury, viewed as the benchmark for U.S. government financing, fell more than 4 basis points to 4.441%. The yield on the 2-year U.S. Treasury, which is more sensitive to Federal Reserve policy, dropped more than 5 basis points to 4.035%. The yield on the 30-year U.S. Treasury also declined by 3 basis points to 4.942%.
The bond market typically views geopolitical developments in tandem with energy prices. Following the announcement of this agreement, investors reassessed the Middle East risk premium, leading to simultaneous adjustments in safe-haven assets and interest rate expectations.
The reopening of the Strait of Hormuz lowers oil prices.
Trump stated that he has approved the reopening of the critical waterway, the Strait of Hormuz. In response, international oil prices dropped significantly on Sunday, with U.S. crude falling by 5%.
The decline in oil prices is viewed by the market as a sign that short-term inflationary pressures may ease, which is one of the key reasons for the decline in U.S. Treasury yields. Since yields move inversely to bond prices, a drop in yields means bond prices are rising.
The market shifts focus to the Federal Reserve meeting.
Despite signs of easing tensions between Washington and Iran, clashes have continued between Israel and Lebanon’s Hezbollah, which is backed by Iran, highlighting the fragile foundation for regional ceasefire.
This week, the market will also focus on U.S. housing and retail sales data, as well as the Federal Reserve’s policy meeting. According to the CME FedWatch tool, federal funds rate futures indicate a probability of over 98% that the Fed will hold rates steady at this meeting.
Michael Landsberg, Chief Investment Officer at Landsberg Bennett Private Wealth Management, said that, given the recent uptick in inflation, the market does not expect any actual policy changes at this week’s meeting. He added that investors will be more focused on the post-meeting communications, particularly the policy signals conveyed during the press conference.