Treasuries rallied late in New York trading after President Donald Trump indicated a potential end to the conflict with Iran, concluding a day of considerable volatility for global bond markets. Trump’s comments on Monday sent oil prices back below $US90 a barrel, alleviating concerns that rising energy prices would contribute to inflation. Yields on 10-year treasuries closed the session four basis points lower, around 4.09 per cent, after having spiked earlier to 4.21 per cent.
Padhraic Garvey, Head of Research for the Americas at ING, noted the market’s reaction, observing the impact of higher oil prices, elevated volatility, increased yields, and risk-off sentiment. He suggested a swift resolution to the conflict would likely be more favourable for the Trump administration than a prolonged engagement. The rebound in the $US31 trillion US government debt market followed a session in which numerous global bond markets had experienced sell-offs. Two-year UK yields finished the day 11 basis points higher at 3.98 per cent, after peaking with an increase of 30 basis points earlier in the session.
Swaps, which had initially implied a 60 per cent chance of the European Central Bank raising rates twice this year, ended the day pricing odds closer to 35 per cent. Market participants also priced in a slightly less than 50 per cent 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 per cent before receding to 2.31 per cent.
Traders continue to anticipate the Federal Reserve’s next quarter-point rate cut no earlier than September. Prior to the US attack on Iran on February 28, traders had fully priced in a move by July. Bond options data reveals that some traders are betting the Fed will not cut rates at all this year. The market cool-off commenced after G7 finance ministers announced their readiness to take necessary measures to support global energy supply, potentially including the release of strategic oil reserves, although the group has not yet reached that point.
