Brent crude oil prices continued to decline until they were trading below $77 per barrel. Commodity market sentiment calmed down following the reported increase in oil tanker movements in the Strait of Hormuz, following the interim peace agreement reached between the United States (US) and Iran.
Meanwhile, the US Dollar Spot Index was seen to be starting to stabilize after strengthening for two consecutive days previously.
US Bond Market Rises, Stock Market Experiences Sales
Investors in the US bond market (Treasuries) breathed a sigh of relief on Tuesday. The combination of the stock market's falling equity selloff and the decline in world oil prices was seen to have successfully eased some pressure on the US central bank (The Fed) to raise interest rates to curb inflation.
The impact on the bond market:
Bond Yields Fell: Bond yields declined by around 1 to 3 basis points. The decline was led by short-term bonds, which are naturally the most sensitive to changes in the Fed's interest rate policy.
2-Year Yield: The 2-year bond yield fell by about 3 basis points to around 4.20%.
Strong Demand: The latest auction of 2-year Treasury notes received very strong demand from investors.
This situation occurs a week after the first press conference of the new Fed Chairman, Kevin Warsh, which previously triggered a sharp jump in bond yields as traders began to price in that the Fed would further tighten monetary policy due to the increased risk of inflation.
What Should Traders Focus Next?
Now, the main focus of the market shifts to the publication of US personal spending data, which will be released on Thursday this week, for a clearer indication of the economic direction.
At this point, the market seems to be ready and predicting a more hawkish Fed forecast. In fact, when adjusted for inflation, the 2-year bond yield is currently at its highest level since the Fed began cutting interest rates in September 2024.
Trader’s takeaway: The reopening of the Strait of Hormuz is an indirect boon for global inflation markets. As oil prices fall, inflation risks decline, giving bond markets room to recover and reduce the pressure of ‘panic’ over aggressive Fed rate hikes in the near future.
