Oil Prices Plummet Amid Hopes of Iran Deal, US Treasury Yields Fall

US Treasury yields dipped to their lowest level in two weeks on Tuesday as oil prices plummeted over 5% amid hopes of an Iran deal. The sharp decline in oil prices triggered traders to reassess expectations for a Federal Reserve rate hike in September.

The developments came after Qatar announced that mediators were making progress towards ending the US-Iran conflict. Treasury Secretary Scott Bessent also said an agreement to reopen the Strait of Hormuz could be reached as early as Tuesday or Wednesday, further fueling optimism about a potential deal.

However, investors remain cautious due to previous setbacks in negotiations. 'It's like Groundhog Day,' said Lou Brien, market strategist at DRW Trading. 'I don't think that (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, while the benchmark 10-year Treasury yield declined 4.91 basis points to 4.635%. The recent surge in oil prices had raised expectations of a Federal Reserve rate hike to curb inflation.

Traders are now assessing remarks from Fed Chair Kevin Warsh, who acknowledged inflation risks last week but offered no clear policy roadmap. Fed funds futures indicate a 59% chance of a rate hike at the Fed's September 15-16 meeting, down from 68% on Monday.