US Treasuries extended their rally on Monday, following their largest monthly gain in more than two years.
As international oil prices fell sharply, market concerns that energy costs would drive inflation further higher and force the Federal Reserve to keep raising interest rates eased, pushing Treasury prices up and yields down.
Medium- and long-term US Treasuries led the gains, with yields on 10-year to 30-year notes falling by about 4 basis points across the board to their lowest levels since September.
The US 10-year Treasury yield fell as much as 6 basis points during the session, dropping below 4.87% to its lowest since September 10.
By contrast, short-term US Treasuries posted smaller gains.
Analysts noted that the pullback in oil prices not only eased inflation pressure but also helped stabilize US stocks to some extent, weakening some short-term safe-haven demand.
Over the past month, major US technology stocks came under sustained pressure, prompting investors to turn to lower-risk US Treasuries, which became an important factor driving the Treasury rally.
Deutsche Bank rates strategist Steven Zeng said that over the past month, the historically common negative correlation between bonds and stocks appeared to have re-emerged.
He noted that the Treasury rally may be related to investors seeking to hedge against the risk of further stock market declines, while the sharp drop in oil prices also provided support for lower US Treasury yields.
The latest changes in the energy market were another key factor driving US Treasuries stronger.
On Monday, West Texas Intermediate crude futures plunged 7.4% to settle near $96.50 per barrel.
Earlier, both the United States and Iran signaled willingness to resolve their conflict through negotiations, easing market concerns about sustained disruptions to Middle East energy supplies.
The months-long US-Iran conflict had previously driven international oil prices sharply higher and pushed up US inflation pressure.
As energy prices retreat, investors are beginning to reassess the need for the Federal Reserve to further tighten monetary policy in the future.
The Fed implemented its first rate hike since 2023 in September this year, mainly because rising oil prices reaccelerated US inflation.
Although the recent decline in oil prices has eased some inflation concerns, the rates market currently still expects the Fed to raise rates at least two more times by the end of 2027, by 25 basis points each time.
However, over the past month, the cumulative rate hike expectations priced in by the market have declined somewhat.
This means that although investors have not completely ruled out the possibility of further Fed rate hikes, their judgment on the extent of future monetary tightening has moderated compared with before.
It is worth noting that this round of US Treasury gains showed clear maturity differences, with long-term Treasuries outperforming short-term ones, causing the US Treasury yield curve to flatten.
HSBC US investment banking rates strategist Dhiraj Narula said the smaller decline in short-term Treasury yields compared with long-term yields may be related to market adjustments after last week's Fed policy meeting.
Last week, the Fed decided to keep rates unchanged, after which the US Treasury yield curve steepened noticeably.
Monday's market moves may reflect, to some extent, a reversal of those earlier adjustments.
In addition, investors are also watching the US Treasury Department's future debt issuance plans, especially whether the supply of long-term Treasuries may decrease.
Narula noted that questions remain in the market about whether the US Treasury Department will reduce the scale of long-term Treasury issuance.
US officials may provide more information on the issue during quarterly financing strategy discussions on Wednesday.
If the US Treasury Department signals a reduction in long-term Treasury supply, it could further affect market expectations for the supply-demand relationship and yield trends of long-term US Treasuries.
Comments