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(Bloomberg) — Treasuries gained late in New York trading after President Donald Trump signaled the war with Iran may end soon, capping a volatile day for global bond markets.
Trump’s comments on Monday afternoon sent oil back below $90 a barrel, easing concerns that rising energy prices would fuel inflation. Yields on 10-year Treasuries were ending the session lower by four basis points at around 4.09% after earlier spiking to 4.21%.
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“The markets have done some talking here via the higher oil price, elevated volatility,” higher yields and risk-off sentiment that’s threatening to get worse, said Padhraic Garvey, head of research for the Americas at ING. “A quick war is likely better for the Trump administration than a protracted one.”
The rebound in the $31 trillion US government debt market capped a session in which many global bond markets had sold off. Two-year UK yields ended the day 11 basis points higher at 3.98% after earlier rising as much as 30 basis points.
Swaps, which had earlier implied a 60% chance of the European Central Bank hiking rates twice this year, ended the day pricing odds closer to 35%. They saw a slightly less than 50% probability of the Bank of England raising borrowing costs once by the end of the year. German two-year yields surged nine basis points to 2.40% before fading back to 2.31%
Traders still expect the Federal Reserve’s next quarter-point rate cut no earlier than September. Before the US attacked Iran on Feb. 28, traders had fully priced in a move by July. Bond options show some traders are betting the Fed won’t cut rates at all this year.
The cool-off in the market began after Group of Seven finance ministers said they were ready to take any steps needed to support global energy supply, including releasing strategic oil reserves — although the group isn’t at the point of doing so yet.
“The broader question for markets is whether Trump’s apparent retreat from maximalist regime change rhetoric reflects a genuine shift in war aims or merely an attempt to declare victory while hostilities continue at lower intensity,” said Karl Schamotta, chief market strategist at Corpay.
Earlier in the session, focus had been on concern about the global economy after the global benchmark for crude oil surged toward $120 a barrel, up almost 80% since the Iran war began and disrupted shipments from the Middle East. Sustained price increases could force central banks to keep policy tight to curb inflation even as growth slows, leaving the world grappling with stagflation.
The economic toll of that scenario would be significant. A 10% rise in energy costs that persists for a year would lift global inflation by about 0.4 percentage points and shave up to 0.2 percentage points off growth, according to the International Monetary Fund. Bloomberg Intelligence says demand destruction tends to set in when crude hits $133, highlighting the risks if prices continue to climb.
Iran’s selection of the late Ayatollah Ali Khamenei’s son as the next supreme leader signals continuity in Tehran’s stance and little shift in its approach to the war. Meanwhile, output cuts in Kuwait and the United Arab Emirates highlight the growing supply strain after the closure of Hormuz.
In the US, recent data have added to concerns about a potential stagflationary mix. Employers unexpectedly cut jobs in February and the unemployment rate rose, pointing to cracks in the labor market just as price pressures intensify.
In the inflation swap market, the rate to receive payments based on the US consumer price index for one year exceeded 3% for the first time since October, before pulling back to 2.76%. Similar to the yield differential between TIPS and conventional Treasuries, it represents the expected CPI rate over the term.
“Oil is arguably the single most important input into global inflation,” said Tim Murray, a capital market strategist in the Multi-Asset Division at T. Rowe Price. With most Asian economies significant net oil importers, that creates a “relative headwind for the region in a risk-off environment,” he added.
–With assistance from Wenjin Lv, Masaki Kondo, Michael MacKenzie, Edward Bolingbroke, Carter Johnson, Marcus Wong and Ruth Carson.
(Recasts with market prices, comments throughout.)
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