Treasuries Rise as Oil Signals Optimism on Iran Peace Accord

The US Treasury building in Washington. Photo by Ting Shen /Bloomberg

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(Bloomberg) — Treasuries rose and the dollar slipped as investors drew optimism about the prospects of a US-Iran peace deal from a conditional ceasefire between Israel and Lebanon, despite ongoing clashes.

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The moves in US government debt pushed yields lower on Thursday by two to five basis points across maturities as oil prices declined. A gauge of the dollar fell by the most in about a week, touching a session low after US President Donald Trump touted negotiations toward an end to the war in Iran, repeating claims made in recent weeks. 

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Both US assets have been taking cues from the energy market as the war stretches into its third month, with Treasuries rising on the possibility of peace and the dollar fading alongside demand for havens. Global benchmark Brent crude oil slid to $95 per barrel on Thursday, even as Iran said there had been no recent progress in talks with the US over an interim peace deal and fighting persisted in Lebanon. 

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The war-driven surge in oil prices hit the $31 trillion Treasuries market by stoking inflation and wiping out expectations for Federal Reserve interest-rate cuts. Those expectations also are subject to the health of the labor market, however. 

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US employment data for May, scheduled to be released Friday, are expected to show a slowdown in job creation. Other labor-market gauges — including an up-tick in applications for unemployment benefits last week and a rise in private-sector job growth — have so far left intact expectations that the Fed will raise interest rates this year.

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Traders are pricing in a roughly 70% chance that the US central bank hikes before the end of 2026 and are certain of one by March of next year. It marks a sharp recalibration in wagers from before the US and Israel attacked Iran in February, when traders expected a series of cuts. The Fed lowered rates three times last year, then paused amid indications of stabilization in the labor market.

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Concern about inflation has since come to the forefront as traffic remains largely halted in the Strait of Hormuz, limiting the world’s supply of oil and pressuring energy prices higher. Fed officials have in recent weeks voiced the need for the central bank to monitor the data closely and consider a hike if inflation keeps accelerating. 

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