US Treasury yields fall as oil retreats on Iran deal hopes, Fed hike bets ease

Interest-rate-sensitive two-year US Treasury yields fell to a two-week low on Tuesday as oil prices tumbled more than 5% to a three-week low amid hopes of a deal to end the Iran war, according to a Reuters report. The decline prompted traders to scale back expectations of a Federal Reserve rate hike in September.

Qatar said mediators were making progress toward ending the US-Iran conflict. In contrast, Treasury Secretary Scott Bessent said an agreement to reopen the Strait of Hormuz could be reached as early as Tuesday or Wednesday.


The developments raised hopes that the war may be nearing a resolution, although investors remained cautious after several previous setbacks in negotiations.

"It's like Groundhog Day," said Lou Brien, ⁠market strategist at ‌DRW Trading, told Reuters. "I don't think that (U.S. President Donald) Trump wants the war going on when the (midterm) election is here. I don't think any of the other countries around ⁠there really want the war going on any further. They want just to find some status quo and then just exist with it."

The two-year Treasury yield, which closely tracks expectations for Federal Reserve policy, fell 6.22 basis points to 4.194%, its lowest level since July 21.

The benchmark 10-year Treasury yield declined 4.91 basis points to 4.635%, leaving the gap between two- and 10-year yields at about 44 basis points.

The recent surge in oil prices as the Middle East conflict intensified had raised expectations that the Federal Reserve might need to increase interest rates to curb inflation, which remains stubbornly above its 2% target.

Traders are also assessing remarks from Fed Chair Kevin Warsh, who acknowledged inflation risks last week but offered no clear policy roadmap. Fed funds futures now indicate a 59% chance of a rate hike at the Fed’s September 15–16 meeting, down from 68% on Monday.

The Treasury Department will outline its borrowing plans for the next two quarters on Wednesday, with investors looking for signs of increased issuance of longer-term debt. The government said on Monday that it expects to borrow $739 billion in the third quarter, $68 billion more than forecast in May, and will provide detailed auction sizes on Wednesday.