Market News

(Bloomberg) -- Treasuries rallied on bets the Federal Reserve will resume interest-rate cuts after oil prices plunged on a US-Iran ceasefire.

The two-year yield dropped seven basis points to 3.72% in Asia trading on Wednesday, while its 10-year counterpart fell five basis points to 4.24%. Crude oil futures tumbled 13%.

The move came after the ceasefire that’s expected to halt the American-Israeli military campaign in exchange for Tehran reopening the Strait of Hormuz. Optimism that oil prices will keep easing, capping inflation, has fueled expectations that the Fed may be able to loosen monetary policy further later this year.

Overnight-indexed swaps signaled a likelihood of about 60% that the Fed may lower the policy rate by the year-end, compared with almost no chance seen at the start of this week. They priced in more than two rate reductions before the US and Israel struck Iran.

“There’s room for more bull steepening” in the near term, said Ken Crompton, head of rates strategy at National Australia Bank Ltd., referring to a larger decline in short-dated note yields than that in longer-tenor bonds. “The market could readjust toward a slightly greater chance of FOMC cuts than currently priced.”

Treasuries posted their biggest loss since October 2024 in March, as the war in Iran triggered a surge in oil prices and fanned concerns that inflation will accelerate globally. While they have since rebounded, the gains have been limited as investors waited for more signs of peace in the Middle East.

“I really do think both sides are looking for an offramp but I’m not sure we’re 100% there yet,” said Win Thin, chief economist at Bank of Nassau 1982. “It feels like markets want to unwind the war trade.”

He added that it’s possible for the 10-year yields to “quickly” fall to 4%.

Bonds in other markets tracked the move in Treasuries. French 10-year bond futures jumped the most since 2023, while yields on similar-tenor notes in Australia and New Zealand both fell more than seven basis points. Japan’s 10-year yield declined at about half that pace.

Emerging-market bonds also rallied, with benchmark yields in South Korea and India both sliding more than 10 basis points. Indonesia’s 10-year yield fell six basis points.

--With assistance from Ruth Carson.

(Adds second chart and emerging-market bonds in last paragraph)