Treasuries Extend Rally as Oil Falls From Multiyear High

Treasuries extended a nascent rally Tuesday as oil prices retreated from multiyear highs, allaying concern about inflationary outcomes resulting from the US war in Iran.

The gains helped to push US two-year yields lower by three basis points to 3.79%, after falling eight basis points on Monday. However, they are still up more than 40 basis points since the war began and headed for the biggest monthly jump since October 2024.

Oil prices whipsawed Tuesday, initially rising on news that an Iranian drone hit a fully laden Kuwaiti oil tanker off Dubai. They pared gains following a Wall Street Journal report President Donald Trump has told aides he's willing to end the military campaign against Iran even if the Strait of Hormuz remains largely closed.

Traders are betting the Fed will hold rates steady in a 3.5% to 3.75% range this year, with a small chance of a quarter-point cut by the middle of 2027.

Why the Move Happened

The retreat in oil prices helped to calm inflationary fears, which had previously driven Treasuries lower. This shift in market focus from inflation to economic growth concerns is a key factor in the recent rally.

Andrew Ticehurst, a senior-strategist at Nomura Australia in Sydney, noted that initially the focus was on the inflationary impacts of the Middle-East conflict, but now markets are starting to think more about downside risks to growth.

How Markets Responded

European bonds largely followed US peers higher, helped by data for the bloc that showed inflation rose 2.5% from a year ago in March, slower than expected among analysts.

Advances in Treasuries over the past few trading sessions were driven more by a focus on the war's threat to global economic growth.

What Analysts Are Watching

Fed Vice Chair for Supervision Michelle Bowman and Governor Michael Barr may offer clues on the path for rates when they speak later Tuesday.

Federal Reserve Bank of New York President John Williams said the current stance of monetary policy is well positioned to balance the risks to maximum employment and price stability goals.

"We've been seeing a shift in market thinking over the past few days, initially the focus was on the inflationary impacts of the Middle-East conflict, but I think now that markets are starting to think more about downside risks to growth."

According to Bloomberg, the rally was driven by a pivot from inflation concerns to economic growth risks.