Treasury yields declined across the curve on Tuesday as renewed optimism around a possible US-Iran agreement boosted demand for government bonds, Bloomberg.reported.
The yield on the benchmark 10-year US Treasury note fell five basis points to 4.51%, while the two-year yield dropped six basis points to 4.06%. The 30-year Treasury yield eased three basis points to 5.03%. US cash Treasury trading had remained shut on Monday due to a holiday.
Investor sentiment improved after US President Donald Trump said negotiations with Iran on an interim arrangement to extend the ceasefire and reopen the Strait of Hormuz were progressing positively. The comments helped pull Brent crude prices back below the $100-a-barrel mark, easing fears of a prolonged energy-driven inflation spike.
However, market caution persisted after reports emerged that US and Israeli forces later struck several Iranian vessels in the Strait of Hormuz, underscoring the fragile geopolitical environment in the region.
Softer oil prices have reduced concerns over persistent inflation and lessened pressure on the Federal Reserve to maintain an aggressive monetary policy stance. Experts said lower energy prices and improving geopolitical sentiment were helping reduce inflation expectations, which supported Treasuries across maturities.
US bond yields had surged earlier this month amid fears that the Iran conflict could trigger the sharpest inflation shock since 2023. Those concerns had prompted traders to increase bets that the Federal Reserve under Chairman Kevin Warsh would keep interest rates elevated for a longer period.
Bloomberg strategists noted that global bond yields may have already peaked as slowing economic growth begins to outweigh the initial inflationary impact caused by disruptions in the Strait of Hormuz. He added that longer-dated government bonds, which currently offer some of the highest yields seen in nearly two decades, could be positioned for gains.
Following recent developments in US-Iran diplomacy, traders have reduced expectations for near-term Fed tightening. Overnight-indexed swaps now fully price in the next Fed rate hike only by March 2027, compared with expectations for December 2026 at the end of last week.
The spread between 30-year and five-year Treasury yields also widened after previously narrowing to its lowest level since May 2025, reflecting easing concerns over a prolonged higher-rate environment.
Meanwhile, broader market optimism remained tempered after the latest US military actions involving Iranian targets. Asian equities pared gains on Tuesday, crude oil prices edged higher again, and the US dollar strengthened against all major Group-of-10 currencies.
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