U.S. government bond yields moved lower on Tuesday as oil prices plunged and optimism grew that negotiators are making progress toward resolving the conflict between the United States and Iran. The drop in crude prompted traders to trim the probability of a Federal Reserve interest-rate increase in September.
Oil fell by about 4%, sliding to levels not seen in three weeks. The decline followed statements from Qatar indicating that mediators were advancing in efforts to bring an end to the U.S.-Iran hostilities. On top of that, Treasury Secretary Scott Bessent said an accord to reopen the Strait of Hormuz might be achievable as early as Tuesday or Wednesday, reinforcing the market mood.
Those developments lifted hopes that a resolution could be near, but market participants remained wary after multiple negotiation rounds have previously failed to produce a deal.
"It’s like Groundhog Day," said Lou Brien, market strategist at DRW Trading. "I don’t think that (U.S. President Donald) Trump wants the war going on when the (midterm) election is here. I don’t think any of the other countries around there really want the war going on any further. They want to just find some status quo and then just exist with it."
Short-dated Treasury yields, which closely track expectations for Fed policy, registered notable declines. The two-year note yield fell 6.22 basis points to 4.194%, marking its lowest level since July 21. The 10-year benchmark yield dropped 4.91 basis points to 4.635%.
The gap between two-year and 10-year yields—often cited as the 2s-10s yield curve—stood at 44 basis points on the session.
Key points
- Oil prices fell roughly 4% to a three-week low after reports of progress in mediation efforts over the U.S.-Iran conflict.
- Traders reduced the odds of a September Federal Reserve rate increase, pushing two-year Treasury yields down to levels not seen since July 21.
- Movements in yields and oil prices affect fixed-income markets, energy-sector valuations, and interest-rate sensitive sectors such as industrials and machinery.
Risks and uncertainties
- Negotiations could yet fail despite reported progress, leaving a risk of renewed volatility in oil and bond markets - this particularly affects energy and financial sectors.
- Market caution persists because previous negotiation attempts have been unsuccessful, creating uncertainty for Fed policy pricing and Treasury markets.
- Short-term shifts in geopolitical developments could rapidly change yield and oil price trajectories, influencing interest-rate expectations and sectors sensitive to borrowing costs.