Treasuries Advance as Drop in Oil Prices Eases Inflation Fears

Treasuries gained on Monday as a decline in oil prices following the U.S. capture of Venezuela’s president helped ease concerns about persistent inflation. The yield on U.S. , .

The drop in oil prices occurred as investors recalibrated expectations around global supply, with geopolitical tensions in the region having previously pushed crude futures higher. A potential revival of Venezuela’s oil output remains distant, given the country’s underinvestment and operational challenges. Meanwhile, has opted to maintain stable production, limiting the immediate upside for prices.

Despite heightened geopolitical tensions, Treasuries outperformed other asset classes. The bond market’s positive reaction was partly driven by reduced inflationary pressures, which may allow the Federal Reserve to continue its rate-cutting path this year. Money markets currently anticipate two quarter-point reductions in borrowing costs by year-end, .

Market participants are now turning their attention to key economic data, including the December reading, . The latest print aligns with economists’ expectations and suggests the U.S. manufacturing sector remains in expansion territory, albeit at a moderate pace.

The Federal Reserve’s recent policy debate highlighted divergent views among officials, with a 9-3 vote in favor of a rate cut at the previous meeting. The central bank remains cautious about downside risks to employment and upside risks to inflation, though officials have maintained that economic growth is on track to remain "moderate."

The yield curve continued to flatten, . This dynamic reflects market expectations of a slower inflation trajectory and a more dovish policy stance by the Fed in the near term.

Investor sentiment appears to be shifting toward the belief that inflation will remain well-controlled, particularly with energy prices easing and global supply dynamics stabilizing. This view supports continued demand for government debt, especially as geopolitical events typically have limited long-term impact on macroeconomic fundamentals.

The Federal Reserve’s upcoming January 28 policy decision will be closely watched for further clarity on the trajectory of monetary policy. Until then, Treasuries are expected to remain in favor among investors seeking lower-risk assets in an environment of moderating inflation and potential policy easing.