Treasuries Rally Falters Ahead of Trump's Iran Address

Treasury Yields Stabilize Amid Mixed Economic Data and Iran Conflict Developments

The $31 trillion Treasuries market saw its recent rally stall after a batch of economic data showed steady hiring and consumer spending on goods, offsetting the prospect of an end to the war in Iran that could pave the way for Federal Reserve interest-rate cuts. Yields were relatively unchanged on Wednesday, with Brent crude oil briefly falling below $100 a barrel, after trimming earlier declines.

Treasury yields have closely tracked the war-related surge in oil prices over the past month, as oil prices have the potential to stoke inflation and delay Fed rate cuts. The cohort of Fed policymakers that sees energy prices as having a limited impact on inflation but a drag on growth that further softens the labor market is "a little more suppressed right now," due to the recent developments in the Middle East conflict.

The latest economic data, including February retail sales and ADP Research's estimate of March private-sector hiring, exceeded economist estimates. February retail sales exceeded expectations, as did ADP Research's estimate of March private-sector hiring. Fed policymakers cut interest rates three times last year in reaction to signs of job-market weakness that have since abated somewhat.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

St. Louis Fed President Alberto Musalem emphasized that risks are rising to both inflation and employment, and officials should be prepared to adjust interest rates in either direction depending on how the economy evolves. Bloomberg Intelligence rates strategists Ira Jersey and Will Hoffman boosted their forecast for the US two-year yield to 3.4% by the end of the year, from nearly 3%, on the likelihood that the Fed will delay rate cuts until at least the final quarter of 2026.

Comparison of Yield Forecasts

Yield levels were sustained after the ISM manufacturing report for March, whose overall gauge rose slightly more than anticipated, also included a measure of prices paid by factories that jumped to the highest level since June 2022, a period when the Fed was raising rates. The limited reaction to this data point may reflect the "unequivocally negative" commentary by respondents to the ISM survey regarding the Middle East war and its economic consequences.

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

Oil prices have tracked sentiment shifts regarding the potential for an end to the Middle East war, which has disrupted supply from the region. Session lows were reached after US President Donald Trump said it could conclude within two to three weeks. Traders are pricing in about seven basis points of Fed easing by year-end, in a sharp contrast to the week-ago consensus that tilted toward a hike.

The bond market is still smarting after last month's selloff, when inflation risks triggered by surging oil prices drove US yields around 40 basis points higher. As a result, a Bloomberg gauge of US government bond returns lost 1.7% in March, the biggest monthly decline since late 2024.