Treasuries Rise in Catch-Up Trade as Trump Sees Progress in Iran Talks

US Treasuries Rally as Investors Grow Optimistic About US-Iran Deal

Treasuries experienced a significant rally across the curve as cash trading resumed after a holiday, with investors becoming increasingly optimistic about a potential US-Iran deal. The yield on the US two-year government note fell six basis points to 4.05%, while those on the 10-year note dropped six basis points to 4.50%. The yield on 30-year notes declined by four basis points to 5.03%.

The cash trading market was closed on Monday, but the return to trading was marked by a shift in investor sentiment. President Donald Trump's comments this week that negotiations with Iran on an interim deal to extend their ceasefire and reopen the Strait of Hormuz were "proceeding nicely" helped to push Brent crude back below $100 a barrel. However, hours later, a reported strike by US and Israeli jets on a number of Iranian vessels in the Strait of Hormuz highlighted the fragile nature of the existing truce.

According to Wee Khoon Chong, senior AC market strategist at BNY, the absence of escalation in the Middle East and the optimism towards a deal is leading to lower oil prices and inflation expectations. This, in turn, is creating a favorable environment for Treasuries across the curve.

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The rally in Treasuries is also attributed to a reduction in expectations for near-term Federal Reserve tightening. Following the latest developments in US-Iran talks, markets have pared back expectations for a rate hike by December 2026, with overnight-indexed swaps now fully pricing in a rate hike by March 2027.

A rebound in the extra yield investors demand to hold 30-year bonds over five-year notes also suggests that some of the market's more hawkish Fed expectations have eased. According to Abbas Keshvani, director of Asia macro strategy at RBC Capital Markets in Singapore, a large part of the bond selloff has been due to heightened inflation expectations on higher energy prices. Progress in US-Iran talks could lead to further reduction in energy prices, inflation expectations, and therefore yields.

BlackRock Inc. and the Federal Reserve

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BlackRock Inc. is among those arguing that the Federal Reserve has sufficient reason to cut rather than hike rates. Navin Saigal, the firm's head of global fixed income for Asia Pacific, stated that pressure on the labor market could justify the Fed staying on hold or cutting rates. His comments contrast with investors betting that new Fed Chairman Kevin Warsh will prioritize the Fed's inflation-fighting credibility over President Trump's push for lower rates.