Treasuries Maintain Gains Amid Signs of Optimism Over Iran Accord

US Treasuries Rise as Oil Prices Fall Amid Signs of Iran-US Accord

Treasuries rose on the latest indications of an agreement to end the US-Iran war, which sent benchmark oil prices plummeting to their lowest levels in over a month. The potential relief from sustained high inflation offered investors a glimmer of hope. 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. This development occurred as oil prices fell after Iranian state television reported an unofficial draft US-Iran memorandum of understanding would allow restored commercial transit shipping through the Strait of Hormuz. The US administration, however, disputed the report, stating it was false. The US attack on Iran in late February disrupted Middle East oil supplies, causing a price surge that has fueled inflation globally.

Central banks, including the Federal Reserve, are expected to raise interest rates in response to the economic pressures. Investors and traders are eagerly awaiting concrete signs that the conflict is coming to an end, which would likely lead to a rally in Treasuries alongside the decline in oil prices.

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At the same time, the US economy appears to be performing well, with the housing market being the only sector showing signs of slowing down in the face of higher yields. The Federal Reserve's preferred inflation gauge, the personal consumption expenditures price index, is due to be released on 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 development has created a tricky situation for the Fed, as the prospect of rate hikes that tighten financial conditions can cap the steepness of the US rates curve.

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.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

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.