US 10-Year Yield Pares Retreat

The yield on the 10-year US Treasury erased its 7bps drop to hover flat on Wednesday after Iran stated the US violated their ceasefire agreement, jeoperdizing the pullback in oil prices that calmed inflation fears. Still, the US refrained from striking Iran as threatened and yield maintained their drop from eight-month highs of 4.45% two weeks prior. Officials had pledged higher tanker flows through the Hormuz chokepoint to somewhat restore higher levels of energy exports with the ceasefire, although reports that tanker operators were still threatened by Tehran had already dimmed optimism of normalized oil. The energy shock since the start of the conflict raised energy costs globally and prompted several FOMC members to increase their concerns of inflationary pressures, per the latest meeting minutes. The initial impact of higher energy prices will be known Friday with the release of the US CPI, which is expected to accelerate to a two-year high.

The yield on the 10-year US Treasury note eased to 4.28% on Wednesday, trimming a sharper retreat from the morning but holding the pullback from eight-month highs of 4.45% two weeks prior, as temporary ceasefire between Iran and the US limited concerns of energy-fueled inflation. The agreement suspended threats of escalatory attacks between both sides, with officials pledging higher tanker flows through the Hormuz chokepoint to somewhat restore higher levels of energy exports. Still, strikes since the ceasefire and reports of tankers being intercepted limited optimism on the relief. The energy shock since the start of the conflict raised energy costs globally and prompted several FOMC members to increase their concerns of inflationary pressures, per the latest meeting minutes, although others continued to stress labor market concerns. The initial impact of higher energy prices will be known Friday with the release of the US CPI, which is expected to accelerate to a two-year high.

The yield on the US 10-year Treasury note fell about 5bps to 4.25% on Wednesday, reaching its lowest level in roughly three weeks. The decline followed news of a two-week ceasefire between the US and Iran, which triggered a sharp drop in oil prices, easing concerns about an inflationary spiral and boosting expectations that the Federal Reserve could cut interest rates this year. Markets now see around a 60% chance of a rate cut by year-end, compared with almost no chance at the start of the week. Before the conflict began, markets had priced in more than two rate reductions. As part of the temporary truce, Iran said it would allow ships to pass through the Strait of Hormuz, helping to alleviate concerns over energy supply disruptions. Investors will also scrutinize the FOMC minutes later in the day for further insight into the Fed’s policy outlook, while the release of US March CPI data on Friday is expected to provide additional clues on price pressures linked to the ongoing conflict.