US bond markets soar on prospects of peace
NEW YORK: Treasuries mostly advanced as investors dialled back expectations for Federal Reserve (Fed) interest rate hikes following news of a deal to halt the Iran war.
The moves on Monday pushed yields lower on most tenors, led by shorter maturities that are among the most sensitive to changes in monetary policy.
Swaps traders are pricing in less than an 80% chance of a quarter-point Fed hike by December, with a move not fully priced in until March 2027. Brent crude slid, easing concerns over inflation. The US dollar fell.
Optimism for a resolution to the Iran conflict was driving markets, with investors focused on a potential reopening of the Strait of Hormuz and a decline in oil prices.
The stakes extend far beyond the US$31 trillion treasury market, given that US bonds serve as the global benchmark for borrowing costs, influencing everything from corporate debt to emerging-market assets.
The dollar’s drop was tied to fading demand for havens.
“Investors believe the decline in oil prices will reduce the need for more aggressive hikes by the developed-market central banks,” said Fabio Bassi, head of cross-asset strategy at JPMorgan Chase & Co.
“Investors are used to the ebb and flow of the news in the Middle East and therefore a lingering scepticism remains.”
Bassi expects the 10-year treasury yield to end the year near 4.7%, and sees a rise above that level as a buying opportunity for long-term investors.
The deepest declines in the treasury market pared as investors awaited more clarity on the US-Iran deal.
Two-year yields earlier fell as much as seven basis points to 4.01%, before ending down about one basis point around 4.07%.
Those on benchmark 10-year notes were also lower by about one basis point to 4.47% after earlier dropping to 4.42%.
“Some of the short positioning in rates will be taken off,” said Matthew Haupt, a hedge fund manager at Wilson Asset Management in Sydney.
“Central banks can now be less hawkish, as they can afford to wait and look through any short-term inflation.”
The United States and Iran said they had reached an interim agreement to reopen the Strait of Hormuz, a channel for roughly a fifth of the world’s oil supplies.
That would come as some relief for the United States where consumer prices rose in April at the fastest pace in three years.
Still, concerns remain surrounding how simple it will be for oil to start moving through the passageway. This puts the spotlight on the new Fed chairman Kevin Warsh and the central bank’s policies.
The Fed is due to announce its next policy decision today with economists expecting the central bank to keep its benchmark rate in a range of 3.5% to 3.75% as it waits to see how the Iran war’s energy-price shock ripples through the economy.
“In bond markets, based on the observed postwar correlations, a 10% decline in oil prices would lead to an approximate 13-basis point decline in US 10-year treasury yields,” said Tomo Kinoshita, a global market strategist at Invesco Asset Management Japan Ltd.
Yields fell across Europe as traders trimmed rate hike bets for both the Bank of England, set to meet tomorrow, and the European Central Bank, which raised borrowing costs by a quarter point last week, the first major central bank to do so. Asian bond markets also rallied.
“Until more details are released and technical negotiations begin, markets are likely to view the framework as a promising first step rather than a final resolution,” said Alyce Andres, the macro strategist of Bloomberg’s markets live.
“That uncertainty is helping put a floor under crude oil prices and limiting the scope for a deeper rally in treasuries.”
The US dollar, meanwhile, fell as optimism over a deal to end the war lowered appetite for haven assets.
A Bloomberg gauge of the dollar is still up about 1.4% since the United States and Israel attacked Iran in late February, and traders last week had an overall positive stance on the currency.
Both the United States and Iran were already casting the deal in a different light, minutes after it was announced, showing how hard it will be to reach an agreement on the outstanding issues around Iran’s nuclear programme.
“The strait is expected to reopen on Friday, so there could be something of a nervous wait between now and then,” said Andrew Ticehurst, a strategist at Nomura Holdings Inc in Sydney. — Bloomberg
