US Treasuries advanced significantly after President Donald Trump signaled that the US would move to blockade the Strait of Hormuz, a critical passage that previously handled about 20% of global oil and liquefied natural gas flows. According to GuruFocus, Trump stated he doesn't care whether Iran returns for another round of negotiations, marking a significant escalation from previous diplomatic efforts. The developments pushed yields lower by one to two basis points across maturities, with those on the benchmark 10-year down to 4.30%. The confirmation came hours after US peace talks with Iran broke down in Pakistan over the weekend, with Trump previously stating he'd blockade the Strait of Hormuz. Iran responded by indicating it would not allow such a blockade, raising the risk of renewed disruption across energy markets. However, recent market moves suggest investors are becoming more accustomed to geopolitical shocks, with Global X ETFs investment strategist Billy Leung noting that "there's a belief that a lot of this is negotiation tactics."
Oil markets moved sharply in the opposite direction, with West Texas Intermediate futures falling 13.4% through Friday and Brent settling around $95 a barrel, down from roughly $112 in March. As reported by GuruFocus, those moves reflected expectations of more stable energy flows, expectations that now appear less certain. The shift in tone could reverse the peace dividend that had supported risk assets late last week, potentially pushing investors back toward more defensive positioning. The earlier rally had been meaningful, with the S&P 500 Index rising more than 3.5% and an MSCI gauge of emerging-market equities advancing 7.4% as the ceasefire narrative gained traction. However, recent developments show a notable market response to the Hormuz blockade announcement, with U.S. crude oil futures for May delivery jumping more than 8% to $104.93 per barrel and international benchmark Brent for June delivery advancing 7% to $102.17. Destination Wealth Management's Michael Yoshikami expects oil prices to eventually retreat to $80 a barrel as he anticipates a negotiated resolution between the US and Iran.
Treasury Secretary Scott Bessent announced that President Trump's tariffs could return to their pre-Supreme Court levels by July, using alternative authority under Section 301. According to The Times of India, Bessent reportedly said at a Wall Street Journal event that "We had a setback at the Supreme Court in terms of the tariff policy, but we will be implementing or conducting Section 301 studies, so the tariffs could be back in place at the previous level by the beginning of July." After the high court declared that Trump's use of emergency powers to impose those prior duties was unconstitutional, Trump is attempting to reinstate his tariff wall using alternative authority. Trump had put a temporary 10% charge on certain imports after the Supreme Court overturned many of his international tariffs, with that levy scheduled to expire on July 24. Bessent noted that corporate executives can now begin planning and making decisions regarding capital expenditures because the Section 301 tariff power has already been tested in court. The president said he intends to rely on Section 122 of the Trade Act of 1974, which allows him to impose tariffs unilaterally, though this provision limits such measures to a maximum duration of 150 days and caps the rate at 15%.
US money-market traders continue to bet that the Federal Reserve will resume cutting interest rates by year-end, despite recent inflationary pressures. According to Bloomberg reports, consumer prices data for March showed the biggest monthly increase since 2022, with the risk that higher fuel costs will drive up inflation front of mind for investors. The Fed lowered rates three times last year, then paused amid indications of stabilization in the labor market. Since the US attacked Iran on February 28, traders have recalibrated their expectations, going from pricing in more than two reductions to briefly betting on a hike. If oil remains elevated, markets may have to scale back some of the more optimistic expectations around rate cuts, as noted by Saxo Markets. The Federal Reserve is likely to remain on hold until clearer signals emerge on growth and inflation, though rate cuts before year-end are still expected. Recent market moves show yields on the 10-year Treasury adding more than 333 basis points since the war started, reflecting the impact of higher oil prices and inflation concerns.
Fed meeting swaps linked to the December meeting now price in about seven basis points of easing, or about 28% of a quarter-point cut. As reported by Bloomberg, they fully price in a cut during the second half of 2027. Treasury options flows featured a large buyer of May contracts that would benefit should 10-year yields decline to around 4.1%, a level last seen on March 10. Weakness in Treasurys in the seven- to 10-year maturity segment is an opportunity to buy, according to TD Securities. The dollar index has gained about 1.4% over the same period as the war started, while spot gold prices lost about 0.5% to $4,720.28 per ounce. Standard Chartered's Steve Brice noted that higher oil prices push back any prospects for easier monetary policies, putting upward pressure on bond yields and the U.S. dollar. However, he expects these as temporary phenomena as the US appears to be looking for ways to de-escalate the conflict. The European Central Bank will publish the accounts of its March policy meeting on Thursday, potentially adding further considerations on its thinking about inflation and growth risks stemming from the Middle East war.
