(Bloomberg) — Treasuries rallied on haven demand after reports that Iran launched a missile strike at a US air base in Qatar, escalating the conflict that began when the US bombed nuclear sites in Iran over the weekend.
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The advances in US government debt picked up momentum on Monday after Iranian state media reported the retaliatory attack, which Qatar said was intercepted. Demand for havens had already fueled gains for Treasuries before the escalation, which increased after a Federal Reserve official hinted that an interest-rate cut could come as soon as next month.
The five-year note’s yield declined as much as 10 basis points to 3.86% and remained eight basis points lower on the day, with yields across maturities lower by at least five basis points.
“It’s more uncertainty,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities.
Before the start of the US trading day, Treasuries had fallen alongside other global bonds as the conflict in the Middle East stoked fears of an oil-supply disruption that would fan inflation. Oil, though, erased its initial surge and tumbled as much as 5.8%, leaving haven demand and the Fed policy outlook to drive government bond markets globally.
“For now, it seems like Treasuries are more worried about the negative growth impact via uncertainty, than the inflationary impact of higher crude prices,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management.
US government debt added to its haven-fueled gains Monday after Fed Governor Michelle Bowman said she could support a rate cut in July if inflation remains subdued, echoing comments by Christopher Waller on Friday.
Traders boosted their bets that the Fed will lower rates by at least 50 basis points before the end of the year, with a roughly 20% probability of a reduction in July. Markets are pricing in a September move as more likely.
Yields on two-year Treasuries, most sensitive to the Fed’s monetary policy, are lower by seven basis points at 3.84%. The dollar also reversed, wiping out early gains to trade little changed.
Bowman said in a speech at a conference in Prague that she would support lowering rates at the next meeting as long as “inflation pressures remain contained.” Confirmed this month to serve as the central bank’s vice chair for supervision, she also said the “time has come” to revisit the current approach to leverage ratio requirements amid concerns the rule has constrained lenders’ trading in the $29 trillion Treasuries market.
