Treasury yields retreat as oil prices dip below $100

U.S. Treasury yields have pulled back from their highest levels since 2002, as oil prices dipped below $100 per barrel. The retreat in yields comes amid reassurances from Treasury Secretary Scott Bessent that the government’s debt burden remains manageable. The 10-year Treasury yield fell by 3 basis points to 5.27%, while the 30-year yield dropped 4 basis points to 5.63%. The 2-year yield remained largely unchanged.

The decline in crude oil prices, fueled by increased supplies flowing through the Strait of Hormuz, contributed to the temporary pause in the global bond market sell-off. This sell-off had been driven by inflation concerns linked to the U.S.-Iran conflict and expectations of further Federal Reserve rate hikes. Bessent sought to ease investor worries, stating that economic growth and spending constraints would soon alter the government’s borrowing trajectory.

However, skepticism persists among market participants. Macquarie strategist Gareth Berry noted that with the deficit still at 6% and no clear plan to reduce it, investors may remain cautious. James Ling, a fund manager at Schroders, emphasized that for a meaningful rebound in yields, energy prices, including refined products, must fall. Ray Dalio of Bridgewater Associates warned that the U.S. could face a debt crisis within three years if spending continues to outpace revenue.

HSBC strategists argue that the market’s pricing of roughly 80 basis points of Fed rate hikes by 2027 is excessive, though they expect the yield spread between 5-year and 30-year Treasuries to widen. Dilraj Narula of HSBC noted that surging volatility has led many investors to adopt a wait-and-see approach, despite the appeal of elevated long-term yields.