Treasury Yields Sink as Iran Peace Hopes Trigger Oil Selloff and Revive Fed Rate-Cut Expectations

U.S. Treasury yields fell sharply on Wednesday as mounting expectations of a potential end to the Middle East war sparked a steep decline in oil prices, easing fears of a prolonged global inflation shock and reviving investor optimism around possible Federal Reserve rate cuts later this year.

The benchmark 10-year U.S. Treasury yield dropped about 7 basis points to 4.348%, while the policy-sensitive 2-year yield fell more than 6 basis points to 3.863%. The 30-year Treasury yield also declined, slipping roughly 5 basis points to 4.93%.

The broad move lower in yields reflected a major shift in market sentiment after weeks of extreme volatility tied to the Iran conflict, which had driven energy prices sharply higher and rattled global bond markets. Investors moved back into government debt after signs emerged that Washington and Tehran may be nearing a framework agreement aimed at ending the two-month-long war that disrupted oil flows through the Strait of Hormuz, one of the world’s most critical energy chokepoints.

President Donald Trump said “Great Progress” had been made toward a “Complete and Final Agreement” with Iran, while Axios reported that negotiators were close to finalizing a one-page peace framework.

A spokesperson for Iran’s foreign ministry separately confirmed Tehran was reviewing a 14-point proposal from the United States, fueling hopes that diplomatic negotiations may finally be gaining traction after weeks of military escalation, naval disruptions, and fears of broader regional conflict.

Markets were also encouraged after Trump said “Project Freedom,” the U.S. military operation designed to escort and protect commercial vessels moving through the Strait of Hormuz, had been paused. The developments triggered a sharp reversal in energy markets. U.S. West Texas Intermediate crude futures plunged roughly 10% to $91.70 per barrel, while Brent crude fell about 9% to below $100, marking one of the steepest single-session declines since the conflict began.

The oil selloff carried major implications for global financial markets because investors had increasingly feared that sustained energy disruptions would unleash a second wave of inflation across major economies.

For weeks, economists warned that higher fuel prices could spread rapidly through transportation, manufacturing, food supply chains, and consumer goods, potentially forcing central banks to keep interest rates elevated longer than previously expected.

Wednesday’s drop in crude prices eased some of those concerns almost immediately. Treasury markets reacted strongly because lower energy prices tend to reduce inflation expectations, which in turn increases the likelihood that the Federal Reserve may eventually begin lowering borrowing costs.

The sharp decline in the 2-year Treasury yield was especially significant because that maturity closely tracks expectations for future Fed policy decisions. Bond traders are increasingly betting that if oil prices continue retreating and geopolitical tensions stabilize, the Fed may regain flexibility to pivot toward monetary easing later this year after months of caution tied to inflation risks.

The rally in Treasurys also highlights how deeply global markets have become intertwined with developments in the Middle East conflict. Since the war began, investors have oscillated between fears of supply shocks, inflation spikes, and recession risks, creating violent swings across oil, equities, currencies, and fixed-income markets.

The Strait of Hormuz remains central to those concerns. Roughly one-fifth of the world’s oil supply typically passes through the narrow waterway, making any threat to shipping there a major global economic issue. Although traffic disruptions and military tensions have persisted, hopes for a negotiated settlement are now beginning to outweigh worst-case fears in financial markets.

Still, analysts caution that volatility could remain elevated because negotiations remain fragile and energy infrastructure disruptions may take time to fully normalize even if a ceasefire agreement is reached. Several major oil companies and shipping executives have warned that restoring stable flows through the Gulf could require weeks or even months due to damaged logistics chains, repositioning of tankers, and depleted inventories.

Markets are also watching whether lower oil prices translate into broader relief across inflation-sensitive sectors. A sustained decline in energy costs could ease pressure on consumers already facing high borrowing costs, elevated insurance expenses, and rising food prices tied to the war.

Attention now shifts to upcoming U.S. economic data releases, including the latest private-sector employment figures from ADP and mortgage market indicators, both of which could influence expectations around the Federal Reserve’s next moves.

For now, however, the Treasury market is signaling that investors see a reduced probability of an extended energy-driven inflation crisis, at least compared with the worst fears that dominated markets earlier in the conflict.