U.S. Treasury yields fell significantly as optimism grew that the Iran war may be nearing resolution, easing concerns about a renewed bout of inflation. Iranian Foreign Minister Abbas Araqchi confirmed that the Strait of Hormuz - through which a fifth of the world's oil and liquefied natural gas usually transits - was open following a ceasefire agreement in Lebanon. As reported by Reuters, U.S. President Donald Trump said talks could take place this weekend and he believes a deal to end the war would come 'soon', with oil prices falling by around 11% on the news. "I think that's what's driving the whole move," said Tom di Galoma, managing director of global rates trading at Mischler Financial Group. "Do we actually get a prolonged ceasefire and a Strait reopening? I don't know. This seems like it's going to take some time to work itself out. But right now, I think that's what's going on. ... It's all the good news coming out of the Gulf."
U.S. Treasuries gained significantly to wrap up a choppy week of war-driven swings, as easing tensions in the Middle East drove oil lower and prompted traders to boost wagers that the Federal Reserve will cut interest rates this year. The benchmark 10-year yield closed at 4.24%, down from 4.32% a week earlier, while the two-year yield fell below the Fed's 3.75% upper bound, touching its lowest intraday level since March 18. As reported by Bloomberg, Brent crude fell below $90 a barrel, with the rally pushing yields to their lowest levels in a month. "As goes crude, so go rates — it's about as simple as that," said Brij Khurana, a portfolio manager at Wellington Management. "Lower oil prices are feeding into softer inflation expectations, while improved sentiment is supporting demand for government bonds."
Federal Reserve policymakers are now weighing the impact of the Iran war ceasefire against ongoing price pressures, with Fed Governor Christopher Waller saying policymakers may need to stay on hold for a prolonged time "if the risks to inflation outweigh those to the labor market," due to the energy shock triggered by war in Iran. Waller voted to keep policy steady at 3.5% - 3.75% at last month's meeting after having voted for a quarter-point rate cut in January. Fed funds futures traders are now pricing in approximately 16 basis points of easing for the December Fed meeting, up from roughly 8 basis points at Thursday's close, according to Bloomberg. The surge in wholesale prices creates complications for monetary policy decisions, with Chicago Federal Reserve President Austan Goolsbee indicating that interest rate cuts may need to wait until 2027, depending on how long oil prices stay elevated.
US wholesale prices experienced a significant surge last month, with the producer price index rising 0.5% from February and 4% year-over-year from March 2025, according to the Labor Department report released Tuesday. As reported by Associated Press, this marked the biggest year-over-year gain in more than three years. The surge was primarily driven by energy price increases, which surging 8.5% from February due to the ongoing war in Iran. The latest data follows a sharp rise in consumer inflation, with gasoline prices pushing consumer prices up 3.3% last month from a year earlier, the biggest year-over-year increase since May 2024, as reported by Associated Press. War-driven disruptions in the Middle East have pushed oil prices higher, while trade tariffs have added to cost pressures, stoking concerns about a renewed bout of inflation as price growth remains above the Fed's 2% annual target.
Kevin Warsh, Trump's nominee to lead the Fed, is expected to push for more interest rate cuts if he becomes Fed chair, replacing Jerome Powell when his term ends next month. As reported by Reuters, Warsh's confirmation hearing is scheduled for April 21, with San Francisco Fed President Mary Daly noting that Warsh may have plans for big changes at the U.S. central bank, but like previous Fed leaders cannot know what economic surprises he may need to deal with once in the role. The surge in wholesale prices creates complications for monetary policy decisions, with Chicago Federal Reserve President Austan Goolsbee indicating that interest rate cuts may need to wait until 2027, depending on how long oil prices stay elevated. The Fed kept its interest-rate target range steady at its mid-March policy meeting at between 3.5% and 3.75%, while offering forecasts that penciled in one more easing at some point later this year.
