Treasuries Waver as Iranian Official Says Ceasefire Violated(Bloomberg) -- Treasuries wavered between gains and losses, erasing most of an earlier rally, after an Iranian official said the ceasefire deal with the US had been violated.
US government debt had gained overnight, and traders slightly increased their wagers on a Federal Reserve interest-rate cut this year, after the announcement on Tuesday evening of a two-week truce between the US and Iran — after weeks of war — caused oil to plunge.
But on Wednesday, some of those moves were pared after Iranian Parliament Speaker Mohammad-Bagher Ghaliba said in a statement that three clauses of the ceasefire proposal have been violated. Oil remained lower by more than 10%, but the benchmark two-year Treasury note, the coupon that’s most attuned to expectations for Fed policy, erased its gain for the day.
The earlier advance in Treasuries echoed heftier gains in European government debt markets. Optimism for an eventual peace deal helped to relieve some concern surrounding an oil-driven surge in global inflation and its impact on the path of central banks.
Interest-rate swaps implied traders see less than a one-in-three chance that the Fed delivers a quarter-point reduction by the end of 2026. Earlier in the day, they’d boosted those wagers to reflect a 50% possibility of a cut.
“The important part of all of this is trying to filter out the noise and does this really change the outlook in a major way for the economy or for inflation?” Kevin Flanagan, head of investment strategy at WisdomTree, said earlier in the day. “Our viewpoint was we were going to continue to have moderate growth and above Fed target inflation. I don’t think any of that has changed.”
The White House said the US would hold direct talks with Iran even as continued fighting in the Middle East, punctuated by Israeli strikes in Lebanon, threatened to derail the ceasefire in the six-week conflict.
Earlier, US yields fell by less than two basis points, trailing steeper yield declines in most European bond markets, reflecting the region’s greater exposure to soaring energy prices. The US 10-year yield was flat in New York afternoon trading, at about 4.29%, after being lower by about two basis points.
Short-maturity euro-zone and UK yields plunged earlier as traders slashed wagers on rate hikes by the European Central Bank and Bank of England. As part of the two-week truce, Tehran agreed to reopen the Strait of Hormuz, a crucial transit route for oil and gas shipments. Crude prices plunged.
“You can take out more hikes from the European central banks,” Myles Bradshaw, head of global aggregate strategies at JPMorgan Asset Management, said on Bloomberg TV. “The inflation shock is relatively small and what’s uncertain is the growth shock,” he added, saying the economy was in a more vulnerable position than when Russia invaded Ukraine in 2022. “In that world, central banks will err on the side of caution.”
Markets had been pricing in stable or falling rates in Europe before the war stoked concerns that inflation would accelerate globally. Since the US and Israel launched strikes against Iran on Feb. 28, yields in Europe soared to multi-year highs and gauges of market volatility posted a record surge. US Treasuries also sold off sharply, leading Treasuries to post their biggest monthly loss since 2024 in March.
Oil tumbled after Trump announced the truce on Tuesday, roughly 90 minutes before his deadline for Iran to reopen the strait or face a massive military bombardment.
But while falling energy costs should ease the pressure on policymakers to act to keep inflation in check, some investors say it is too soon to sound the all-clear.
“A lot of negotiation needs to take place before we can say this is over,” said Matthew Amis, an investment manager at Aberdeen. “Markets are going to be even more sensitive to headline risk over the next two weeks, therefore this doesn’t feel like a one way move in yields just yet.”
At the depth of the rout last month, swaps implied four rate hikes from the ECB and BOE this year, with the first expected as early as this month. By Wednesday, the expectations had dwindled to just two quarter-point increases from the ECB and one from the BOE later this year.
If the ceasefire holds, the next challenge for investors will be to assess the extent of damage to energy infrastructure and the knock-on impact for energy prices in the coming months. Much will now depend on how quickly transit through Hormuz can resume.
--With assistance from Ruth Carson, Alice Atkins, Sujata Rao, Miles J. Herszenhorn and James Hirai.
(Updates throughout.)
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