US Treasuries advanced for a third consecutive session on Tuesday, supported by a sharp fall in oil prices as investors grew increasingly optimistic that diplomatic talks between the US and Iran could lead to the reopening of key tanker routes through the Arabian Peninsula, according to a report by Bloomberg.
The rally pushed the yield on the benchmark 10-year Treasury down by three basis points to 4.62%, marking its longest run of gains in a month. The spread between 10-year and two-year yields also narrowed to its smallest level in almost four weeks, reflecting shifting expectations around monetary policy.
For hedge fund managers and macro investors, however, the bond market continues to send mixed signals. While lower energy prices have eased some inflation concerns, traders have not fully abandoned expectations that the US Federal Reserve could still tighten policy. Interest-rate swaps continue to imply close to a 40% probability of a rate increase at this week’s Federal Open Market Committee meeting, with a September hike remaining fully priced into markets.
Despite the recent recovery in government bonds, US Treasuries have still delivered negative returns for July overall, according to Bloomberg’s bond index, as investors continue to weigh the inflationary and economic consequences of conflict in the Middle East. Although US President Donald Trump has pointed to ongoing diplomatic efforts with Iran, he has also warned that hostilities could resume, leaving markets sensitive to geopolitical developments.
The uncertainty has been compounded by the Federal Reserve’s communication strategy under chair Kevin Warsh. Unlike previous Fed leadership, Warsh has refrained from signalling the likely direction of policy ahead of meetings, leaving investors with less guidance than they have become accustomed to over the past decade.
Tuesday’s gains in Treasuries also influenced demand expectations ahead of the US Treasury’s auction of seven-year notes, the final coupon sale before the market pauses new issuance until mid-August. Even after the rally, the securities were expected to be issued at their highest yield since December 2024, highlighting that borrowing costs remain elevated despite the recent improvement in bond prices.
