Bond markets returned from the Memorial Day break on Tuesday to a complicated picture: renewed hopes for a peace agreement between the United States and Iran, fresh U.S. military strikes on Iranian soil, and a set of economic data releases looming later in the week.
The result was a broad decline in Treasury yields. According to CNBC, the yield on the 10-year U.S. Treasury note fell more than 8 basis points to 4.485%. The 2-year Treasury yield, which tracks short-term Federal Reserve policy more closely, dropped 7 basis points to 4.057%. The 30-year Treasury bond yield declined more than 7 basis points to 5.009%. Yields and prices move in opposite directions, and one basis point equals 0.01%.
The U.S. yield moves were in part catching up to large declines already seen in European sovereign yields on Monday, when U.S. markets were closed. European bonds gave back some of those gains on Tuesday as investors weighed conflicting signals about the status of peace negotiations with Iran.
The military situation added to the uncertainty. U.S. forces carried out strikes in southern Iran early Tuesday, which Central Command described as "self defense" strikes. Secretary of State Marco Rubio, who was in India, said the Strait of Hormuz will ultimately have to be opened "one way or the other." Iran's Islamic Revolutionary Guard Corps said it would retaliate after identifying and engaging U.S. drones and an F-35 fighter jet it said had entered Iranian airspace.
Those events unfolded even as President Donald Trump posted on Truth Social that peace negotiations were "proceeding nicely" and that a deal could be near.
Pooja Kumra, Senior European and UK Rates Strategist at TD Securities, addressed the broader bond market picture in a Bloomberg interview on Tuesday. She said recent yield moves are being driven more by real yields than by inflation expectations, with long-end bond markets carrying much of what she described as a stagflation premium. Higher oil prices and fiscal concerns were also factors she pointed to in assessing where global bond markets stand.
Investors are watching closely for economic data due later this week. The Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures Price Index for April, is scheduled for release. Bank of America is forecasting a 0.4% increase from March and a 3.8% year-on-year increase in headline PCE. That reading will factor into how traders assess the Fed's next moves on interest rates.
