U.S. Treasury prices and crude oil briefly pared losses on Monday after a Wall Street Journal report indicated that Iran signaled a desire to end its conflict with Israel. Despite this, bond markets continued to weaken, with Treasury yields rising by 2 to 6 basis points across maturities during afternoon trading in New York. Meanwhile, stock markets gained ground.
Oil Prices Remain Elevated, Raising Inflation Concerns
Oil prices stayed well above pre-conflict levels following last week’s Israeli attack, fueling worries about sustained inflation pressures. The two-year Treasury yield edged up about two basis points to 3.97%. This movement reflected reduced bets on an accommodative Federal Reserve, which is now expected to cut interest rates by roughly 45 basis points this year, slightly less than the 49 basis points anticipated last Friday.
Focus Shifts to Upcoming Federal Reserve Meeting
The bond market is closely watching the start of the Federal Reserve’s two-day policy meeting on Tuesday. While the Fed is widely expected to hold rates steady, it will update its economic outlook and interest rate forecasts in its quarterly “dot plot.” In March, officials projected two rate cuts for 2025.
Kevin Flanagan, head of fixed income strategy at WisdomTree, noted the uncertainty: “If there’s any risk to the Fed meeting, it’s going from two cuts to one because it only takes one or two members to change that.”
Bond Auction Signals Mixed Investor Sentiment
Longer-dated bonds struggled after a $13 billion auction of 20-year bonds held on Monday. Although the auction met expected yield levels—a significant improvement from a disappointing auction last month—it failed to rally the market. The auction was scheduled two days earlier than usual due to the timing of the Fed meeting and a U.S. holiday.
Geopolitical Tensions Weigh on Treasury Demand
Treasury prices have declined since Israel and Iran’s conflict intensified. Historical data shows that previous direct confrontations between these countries led to sharp rises in U.S. bond yields that lasted about a month.
Oil prices initially spiked following weekend attacks in Israel and Iran but retreated on Monday. West Texas Intermediate crude dropped as much as 4.9% before settling down about 2.3%.
Ed Al-Hussainy, interest rate strategist at Columbia Threadneedle Investment, commented on market volatility risks: “The channel at play is shocks that cause implied volatility to rise and cause a pullback in risk and interest rate demand.”
Inflation and Budget Deficit Concerns Persist
Investors remain concerned about potential inflationary pressures fueled by President Trump’s policies and possible increases in the U.S. budget deficit. These concerns lead traders to demand higher yields, especially for long-term bonds.
Last week’s 30-year bond auction showed stronger-than-expected demand, while the 20-year auction underperformed in comparison. The 20-year bonds yielded 4.942%, in line with forecasts, with non-dealers receiving an 86.6% allotment, slightly above recent results.
Outlook on Treasury Yields and Geopolitical Risks
Wei Liangchang, macro strategist at DBS Group Holdings in Singapore, warned: “The U.S. Treasury yield curve is likely to remain under pressure. Investors may consider increasing military spending in the long term due to a more uncertain geopolitical environment, and inflation will face the risk of continued rise if oil prices remain high.”
Strategists Remain Cautious Ahead of Fed Decision
Bloomberg strategists noted that while the recent bond auction removed one risk factor for long-term bonds, a significant rally in the bond market before the Fed’s announcement remains doubtful. The market is likely to remain cautious amid geopolitical uncertainties and inflation concerns.
