US | Markets dial back Fed hike fears as tensions ease

Summary

Short-term yields have declined as markets reassess the Fed outlook and move away from pricing rate hikes this year, with the 2-year leading the adjustment and the long end moving more modestly.

Key points

• Key points:
• The recently extended temporary US-Iran ceasefire has kept long-term Treasury yields confined to a relatively narrow range over much of the past month.
• A definitive peace agreement could favor a near-term rally in Treasuries, particularly as the recent decline in volatility points to a liquid and largely unstrained market.
• The dollar has given up much of the appreciation seen in recent weeks amid hopes for the end of the war, driving the recent recovery in risky assets elsewhere.
• By late March, markets were pricing in roughly a 45% chance that the Fed would raise rates again before year-end, whereas today that likelihood is essentially negligible.
• 30-year mortgage rates, which had reached their lowest level since September 2022, have retraced about half of the roughly 60bp increase seen after the conflict outbreak.

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