Treasuries Rise as Falling Oil Prices Trim Fed Rate-Hike Wagers

Treasuries rose on Tuesday as signs of progress toward a diplomatic resolution of the Iran war sent oil prices lower, curbing expectations for more than one Federal Reserve interest-rate hike in the coming year.

Yields fell across maturities by three to four basis points, with the yield on the two-year note reaching the lowest level since July 21 and the benchmark 10-year yield at 4.64%. Treasury yields have tracked oil prices to varying degrees since the US attacked Iran in late February, helping push up inflation and bolstering the case for tighter US monetary policy.

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On Tuesday, West Texas Intermediate crude futures fell around 5% to their lowest since July 13, following comments by US Treasury Secretary Scott Bessent and representatives of Qatar suggesting the US and Iran were close to an agreement — the latest in a series of similar developments since the war began.

Short-term interest-rate futures contracts price in about 15 basis points of Fed tightening for the next policy meeting in September, more than half of a quarter-point hike. An increase is fully priced in by year-end. As recently as last week, two hikes were fully priced in.

The Treasury market has also been contending with the possibility that a robust US economy may require higher interest rates to curb inflation regardless of oil prices, with investors awaiting the July employment report on Friday to potentially provide clarity on that point. In the meantime, Tuesday’s data on June job openings drew scant market reaction as it showed a bigger-than-estimated decline.