The ceasefire between the US and Iran caused a sharp drop in oil prices and bolstered market expectations for the Federal Reserve to resume interest rate cuts, driving up US Treasury prices, with short-term bonds leading the gains. During the Asian trading session on Wednesday,$U.S. 2-Year Treasury Notes Yield (US2Y.BD)$fell by 6 basis points to 3.73%,$U.S. 10-Year Treasury Notes Yield (US10Y.BD)$dropped by 3 basis points to 4.26%. Crude oil futures prices plummeted by 14%.
The 'bull steepening' of U.S. Treasuries occurred after the temporary ceasefire agreement between the U.S. and Iran was reached. The core condition of the agreement is that Iran will open the Strait of Hormuz in exchange for the U.S. suspending military action. The prospect of easing oil crisis boosted expectations that the Federal Reserve may further ease monetary policy later this year.
It is reported that the so-called 'bull steepening' strategy in the U.S. Treasury market refers to a scenario where short-end yields (such as those for two years or less) decline sharply due to rising expectations of Federal Reserve rate cuts. Meanwhile, long-end yields (such as those for 10 to 30 years) experience more moderate declines but still trend downward overall, leading to a rapid widening of the spread between long- and short-term yields. The entire yield curve becomes steeper against the backdrop of a bull market in Treasury prices characterized by 'price increases/yield decreases.'
Ken Crompton, Head of Interest Rate Strategy at National Australia Bank, stated: 'There is room for further intensification of bull steepening in the short term. Markets may readjust expectations, believing that the probability of Federal Reserve rate cuts is higher than currently anticipated.'
Overnight index swap trading indicated a roughly 60% probability of the Federal Reserve cutting interest rates by the end of the year, compared to nearly zero at the start of the week. Before the US and Israel launched attacks on Iran, the market had anticipated at least two rate cuts by the Federal Reserve.
Editor/melody