US Treasuries Fluctuate Amid Claims of Ceasefire Breach in Iran

Treasuries Rebound as Iran Ceasefire Deal Faces Uncertainty

The US Treasury market experienced a volatile day on Wednesday, with yields initially rising after a ceasefire deal with Iran was announced on Tuesday evening, only to erase most of those gains as an Iranian official claimed the deal had been violated. The benchmark two-year Treasury note, which is most attuned to expectations for Federal Reserve policy, erased its gain for the day.

The earlier advance in Treasuries echoed heftier gains in European government debt markets, where optimism for an eventual peace deal helped to relieve some concern surrounding an oil-driven surge in global inflation and its impact on the path of central banks. However, oil remained lower by more than 10% after Iranian Parliament Speaker Mohammad-Bagher Ghaliba said that three clauses of the ceasefire proposal have been violated.

Interest Rate Expectations Trimmed Back

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Interest-rate swaps implied that traders now see less than a one-in-three chance that the Fed delivers a quarter-point reduction by the end of 2026, down from a 50% possibility earlier in the day. This reduction in expectations reflects the uncertainty surrounding the ceasefire deal and the potential risks to the global economy.

The White House has stated that the US would hold direct talks with Iran even as continued fighting in the Middle East threatens to derail the ceasefire in the six-week conflict. European bond markets, which had seen steeper yield declines in response to the ceasefire announcement, also pared back some of those gains on Wednesday.

European Markets Lead the Way

Earlier in the day, US yields fell by less than two basis points, trailing steeper yield declines in most European bond markets. The US 10-year yield was flat in New York afternoon trading, at about 4.29%, after being lower by about two basis points. Short-maturity euro-zone and UK yields plunged as traders slashed wagers on rate hikes by the European Central Bank and Bank of England.

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

The two-week truce, which includes Tehran's agreement to reopen the Strait of Hormuz, a crucial transit route for oil and gas shipments, has led to a plunge in crude prices. However, some investors caution that it is too soon to sound the all-clear, as a lot of negotiation needs to take place before the conflict can be deemed over.

Investor Sentiment

"A lot of negotiation needs to take place before we can say this is over," said Matthew Amis, an investment manager at Aberdeen. "Markets are going to be even more sensitive to headline risk over the next two weeks, therefore this doesn't feel like a one way move in yields just yet."

If the ceasefire holds, the next challenge for investors will be to assess the extent of damage to energy infrastructure and the knock-on impact for energy prices in the coming months. Much will now depend on how quickly transit through Hormuz can resume.