(May 26): Treasuries rose across the curve after a holiday, as optimism over a potential US-Iran deal pushed oil prices lower and eased inflation concerns.
Yields on the US two-year government note fell six basis points (bps) to 4.06%, while those on the 10-year dropped 5bps to 4.51%. Thirty-year yields declined 3bps to 5.03%. Cash trading was closed on Monday.
President Donald Trump said this week that negotiations with Iran on an interim deal to extend their ceasefire and reopen the Strait of Hormuz were “proceeding nicely”, helping push Brent crude back below US$100 a barrel. But hours later, US and Israeli jets reportedly struck a number of Iranian vessels in the Strait of Hormuz, highlighting the fragile nature of the existing truce.
“The absence of escalation in the Middle East and the optimism towards a deal is leading to lower oil prices and inflation expectations,” said Wee Khoon Chong, senior APAC market strategist at BNY. “This cocktail lessens the pressure for policy tightening, which bodes well for treasuries across the curve.”
US yields surged earlier this month as the Iran war spurred the biggest inflation surge since 2023, leading traders to ramp up bets that the Federal Reserve will need to keep interest rates higher for longer under new chairman Kevin Warsh.
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“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,” says Garfield Reynolds, Markets Live strategist at Bloomberg Strategists.
Following the latest developments in US-Iran talks, markets have pared back expectations for near-term Fed tightening, with overnight-indexed swaps now fully pricing in a rate hike by March 2027 instead of December 2026 as seen at the end of last week.
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The extra yield investors demand to hold 30-year bonds over five-year notes also rebounded from the lowest level since May 2025 as some of the market’s more hawkish Fed expectations eased.
“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 on Monday that pressure on the labour market could justify the Fed staying on hold or cutting rates. His comments contrast with investors betting Warsh will prioritise the Fed’s inflation-fighting credibility over Trump’s push for lower rates.
Meanwhile, the latest US strikes on sites in Iran tempered broader market optimism over a potential deal with Tehran. Stocks pared gains and crude oil climbed in Asian trading on Tuesday, while the dollar strengthened against all of its Group of 10 peers.
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