Oil Price Plunge Sends US Treasury Yields Lower Amid Iran Deal Hopes

US Treasury yields fell to a two-week low on Tuesday as oil prices plummeted over 5% in response to hopes of a deal to end the Iran war. The decline in oil prices led traders to scale back expectations of a Federal Reserve rate hike in September.

The Qatar mediators reported progress towards ending the US-Iran conflict, while Treasury Secretary Scott Bessent mentioned that an agreement to reopen the Strait of Hormuz could be reached as early as Tuesday or Wednesday. This raised hopes that the war may be nearing a resolution, although investors remained cautious after previous setbacks in negotiations.

'It's like Groundhog Day,' said Lou Brien, market strategist at DRW Trading, 'I don't think (U.S. President Donald) Trump wants the war going on when the (midterm) election is here.' The two-year Treasury yield fell 6.22 basis points to 4.194%, its lowest level since July 21.

The recent surge in oil prices had raised expectations that the Federal Reserve might need to increase interest rates to curb inflation, which remains above its 2% target. Traders are also assessing remarks from Fed Chair Kevin Warsh, who acknowledged inflation risks last week but offered no clear policy roadmap. Fed funds futures now indicate a 59% chance of a rate hike at the Fed's September 15-16 meeting, down from 68% on Monday.