Treasuries Climb on Signs of Optimism Amid Iran Peace Talks

US Treasury Yields Fall as Investors Hope for Peace Deal Between US and Iran

The US Treasury market experienced a boost on Thursday, with yields falling by two to four basis points across maturities, as investors drew optimism from a conditional ceasefire between Israel and Lebanon. This move comes despite ongoing clashes in the region. The decline in yields was accompanied by a drop in oil prices, which in turn weighed on the US dollar.

Treasuries and the Dollar Take Cues from the Energy Market

Both Treasuries and the dollar have been closely tied to the energy market as the war between Israel and Iran stretches into its fourth month. Treasuries have risen on the possibility of peace, while the dollar has faded as demand for havens has decreased. Global benchmark Brent crude oil prices slid to around $95 a barrel on Thursday, despite Iran's assertion that there had been no recent progress in talks with the US. The war-driven surge in oil prices has had a significant impact on the $31 trillion Treasuries market, stoking inflation and wiping out expectations for Federal Reserve interest-rate cuts.

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US Employment Data and Interest Rate Expectations

US employment data for May, scheduled to be released on Friday, is expected to show a slowdown in job creation. Other labor-market gauges, including an uptick in applications for unemployment benefits last week and a rise in private-sector job growth, have so far left intact expectations that the Fed will raise interest rates this year due to the jump in inflation. Traders are pricing in a roughly 70% chance that the US central bank will hike interest rates before the end of 2026, and are certain of one such move by March.

Fed's Interest Rate Expectations

The Fed's interest rate expectations have undergone a significant shift since the US and Israel attacked Iran in February. Prior to the attack, traders expected a series of interest-rate cuts. However, the Fed lowered rates three times last year, then paused amid indications of stabilization in the labor market. Concern about inflation has since come to the forefront, as traffic remains largely halted in the Strait of Hormuz, limiting the world's supply of oil and pressuring energy prices higher. Fed officials have voiced the need to closely monitor the data and consider a hike if inflation continues to accelerate.

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