US Treasury prices climbed as oil markets retreated following a pause in American military strikes against Iran, giving bond investors a brief window of relief. But the celebration comes with an asterisk: traders are still pricing in roughly a one-in-three chance that the Federal Reserve hikes rates at its next meeting.
What’s driving the move
The US pause in strikes against Iran removed the most immediate catalyst for an oil price spike, and Treasury prices responded by moving higher, with yields falling correspondingly.
Prior to this de-escalation, the bond market had been under significant pressure. Two-year Treasury yields had surged above 4.21%, hitting multi-month highs as earlier oil price spikes stoked fears of persistent inflation. Those yields have since retreated as the geopolitical premium baked into energy markets started to deflate.
Market pricing still reflects approximately a 36 to 38 percent probability of a Fed rate hike at the upcoming policy meeting. The Fed itself has acknowledged the inflation risks tied to Middle East oil shocks alongside strong domestic demand factors, according to recent meeting minutes.
