US Treasuries climbed Thursday as oil prices slid, following a pause in hostilities between the US, Israel, and Iran. The retreat in crude eased inflation fears, giving bond investors a reason to buy.
Oil's slide and inflation relief
Brent crude fell more than 3% after reports emerged that the US and Israel had agreed to a temporary halt in strikes against Iranian targets. The move calmed markets that had been bracing for a wider conflict that could disrupt oil supplies from the Middle East.
Lower oil prices directly reduce input costs across the economy, from gasoline to plastics. That takes pressure off consumer prices and gives the Federal Reserve more room to consider rate cuts later this year. Traders now see a higher chance of a quarter-point cut at the next meeting.
What this means for the Fed
The central bank has been watching inflation data closely. A sustained drop in energy costs could tip the balance toward easing. But Fed officials have said they need more than one month of data before making a move. Thursday's bond rally suggests investors are betting the pause in the conflict will hold and that inflation will keep cooling.
The yield on the 10-year Treasury note fell 8 basis points to 4.12%, its lowest in three weeks. Two-year yields also dropped, signaling expectations for lower short-term rates.
Market reaction
Stock indexes edged higher, with the S&P 500 up 0.3%. Energy stocks lagged as oil companies saw their profit outlook dim. The dollar weakened slightly against a basket of major currencies.
Analysts at Goldman Sachs said the pause reduces the risk of a supply shock but warned that the situation remains fragile. If fighting resumes, oil could spike again, they noted.
The next big test comes when the Fed releases minutes from its last meeting next week. Investors will look for any shift in language about the timing of rate cuts.
