(Bloomberg) -- Treasuries rose as investors reacted to oil price declines after US President Donald Trump said peace negotiations with Iran were proceeding, even as tensions in the Middle East remain high.
The advances on Tuesday came as the US and some European markets reopened after a holiday, with 10-year Treasury yields lower by as much as eight basis points to 4.47% and 30-year yields dipping below 5%.
On Monday, Trump said talks with Tehran on an interim deal to extend the ceasefire and reopen the Strait of Hormuz were "proceeding nicely." But hours later, US and Israeli jets struck a number of Iranian vessels in the strait. Still, US benchmark crude oil futures traded at the lowest level in nearly three weeks.
"The idea of a deal — rather than the actual deal — is helping to keep the bid in Treasuries," said Pooja Kumra, senior UK and European rates strategist at Toronto Dominion Bank. "That said, we doubt that there will be this permanent relief rally until there is an actual deal."
US yields spiked this month as the Iran war, via its impact on oil prices, spurred the biggest inflation surge since 2023. That's led traders to ramp up bets that the Federal Reserve will keep interest rates higher for longer under its new chair, Kevin Warsh.
Following the latest developments in US-Iran talks, markets have pared back expectations for near-term Fed tightening, with overnight-indexed swaps fully pricing in a rate hike by March 2027. At the end of last week one was fully priced in by December 2026.
The rally trimmed the expected yield for an auction of new two-year Treasury notes at 1p.m. New York time. The indicated yield of about 4.07%, though still higher than monthly two-year auction results since February 2025, has fallen from as high as 4.14% on Friday.
Friday's yield highs were reached after Fed Governor Christopher Waller — one of the most dovish policymakers in the past year — said their next statement should make clear that the next move is just as likely to be an increase. Shorter-maturity yields rose most, pricing in more Fed tightening. The five-year note's yield rose to within 80 basis point of the 30-year bond's, the smallest gap in a year.
What Bloomberg Strategists Say ...
"Global yields have peaked as the damage delivered to the global economy starts to overwhelm the initial inflationary impulse created by the long closure of the Strait of Hormuz."
"With central banks also willing to hike rates in order to combat inflation, longer-dated government bonds offering the fattest yields in almost two decades are set up to rally from here."
— Garfield Reynolds, Markets Live strategist
With Tuesday's easing in Fed rate-hike expectations, five-year yields declined more, and the gap with 30-year yields increased to around 82 basis points.
"A large part of the bond selloff has been due to heightened inflation expectations on higher energy prices," said Abbas Keshvani, director of Asia macro strategy at RBC Capital Markets in Singapore. Progress in US-Iran talks "could lead to further reduction in energy prices, inflation expectations, and therefore yields," he added.
BlackRock Inc. is among those arguing the Fed has sufficient reason to cut rather than hike rates. Navin Saigal, the firm's head of global fixed income for Asia Pacific, said on Bloomberg TV Monday that pressure on the labor market could justify the Fed staying on hold or cutting rates. His comments contrast with investors betting Warsh will prioritize the Fed's inflation-fighting credibility over Trump's push for lower rates.
Meanwhile, the latest US strikes on sites in Iran and the Islamic Revolutionary Guard Corps firing on a US fighter jet tempered broader market optimism over a potential deal with Tehran. Stocks pared gains and Brent crude oil climbed, while the dollar strengthened against all of its Group-of-10 peers.
--With assistance from James Hirai and Elizabeth Stanton.
(Adds Treasury auction, updates yield levels.)
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