U.S. and German government bond yields eased on Monday after President Trump announced direct talks with Iran and a plunge in crude oil prices cooled inflation fears. The relief follows a brutal July that pushed long-term borrowing costs on both sides of the Atlantic to multi-year highs.
U.S. Treasury yields slipped across the curve on Monday as a sharp drop in crude oil prices eased immediate inflation worries following a diplomatic opening in the Middle East. The rate-sensitive two-year Treasury yield fell to 4.24%. The benchmark 10-year Treasury note yield dropped to 4.67%. Long-dated paper also caught a breath, with the 30-year Treasury bond yield pulling back to 5.219% after scaling multi-year highs late last week.
Iran talks trigger oil slide
Bond markets drew relief after President Trump announced that direct negotiations with Iranian officials were scheduled for Monday, adding that he had called off a planned military strike to negotiate reopening the Strait of Hormuz. The announcement triggered a more than 4% collapse in global crude oil prices, easing energy-driven inflation fears across bond trading desks.
Monday's calmer trading followed a grueling July, during which benchmark yields climbed sharply and pushed long-term U.S. borrowing costs to 19-year highs. Sovereign debt markets were battered throughout the month by a five-month conflict between the U.S. and Iran, wild swings in energy prices, and mixed signals from the Federal Reserve.
The Fed kept benchmark rates on hold, but three hawkish policymakers dissented in favor of an immediate rate hike. Fed Chair Kevin Warsh further unsettled desks by retreating from traditional forward guidance while stressing a commitment to curb persistent inflation. Meanwhile, June's Personal Consumption Expenditures price index showed headline inflation easing slightly, though core measures stayed above the Fed's 2% annual target. Markets are now pricing roughly a two-thirds probability of a 25-basis-point rate hike before year-end, and traders are turning to this week's labor data, capped by Friday's nonfarm payrolls report, to gauge whether borrowing costs have peaked.
Euro yields hold as inflation ticks up
German yields moved in step with their U.S. counterparts, also supported by the drop in crude oil prices. The two-year German yield fell to 2.766%. The benchmark 10-year Bund yield held steady at 3.155%. That followed a July in which German yields surged roughly 30 basis points to 15-year highs near 3.21%.
Preliminary data showed eurozone second-quarter GDP expanded 0.4%, doubling market forecasts. July flash data showed eurozone inflation ticked up to 2.9% from 2.8% in June. Crucially, core inflation accelerated to 2.5%, driven by rising services costs and energy spillovers. The combination of resilient growth and sticky prices has sharply bolstered market expectations for further European Central Bank tightening.
Source: Investing.com
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