US Treasuries Experience Rally Amid Falling Oil Prices, Favouring Rate-Cut Expectations

Treasuries Rally as Easing Tensions in the Middle East Drive Oil Lower

The US Treasury market experienced a significant gain on Friday, marking a positive end to a volatile week driven by war-related swings. The rally, which pushed yields to their lowest levels in a month, was fueled by Tehran's pledge to reopen the Strait of Hormuz amid a ceasefire between Israel and Hezbollah. This development boosted optimism around broader de-escalation, prompting traders to increase their bets that the Federal Reserve will cut interest rates this year.

The easing of tensions in the Middle East led to a decline in Brent crude prices, which fell below $90 a barrel. This, in turn, triggered a rally in stocks and a decrease in European bond yields, mirroring the move in Treasuries. The benchmark 10-year yield closed at 4.24%, down from 4.32% a week earlier.

Comparison of Benchmark 10-Year Yields

| Date | 10-Year Yield | | --- | --- | | March 18 | 4.14% | | March 25 | 4.32% | | April 16 | 4.24% |

The rally in Treasuries capped a mixed week for the $31 trillion market, with yields following moves in energy prices as investors parsed headlines around developments from the conflict. Lower oil prices are feeding into softer inflation expectations, while improved sentiment is supporting demand for government bonds.

The session saw the two-year yield fall below the Fed's 3.75% upper bound, touching its lowest intraday level since March 18. The front-end rally coincided with traders pricing in about 16 basis points of easing for the December Fed meeting in swaps, up from roughly 8 basis points at Thursday's close.

Fed Governor Christopher Waller said 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. They are next scheduled to meet April 28-29.

Comparison of Two-Year Yield and Fed's Upper Bound

| Date | Two-Year Yield | Fed's Upper Bound | | --- | --- | --- | | March 18 | 3.85% | 3.75% | | April 16 | 3.58% | 3.75% |

Some investors are cautioning that sticky inflation and resilient economic data could keep the Fed on hold for longer, potentially limiting how far yields can fall even as geopolitical risks recede. "This shows just how sensitive the market has been to headlines surrounding Middle East uncertainty," said Gennadiy Goldberg, head of US interest rate strategy at TD Securities. "Many investors will remain sidelined to ensure that the progress is durable and doesn't reverse over the weekend."

Looking ahead, investors await testimony from a Senate committee hearing with Kevin Warsh as he seeks approval to lead the Fed when Jerome Powell's term expires in May.