(Bloomberg) — Treasuries firmed, supporting US stocks, as fears that the war in the Middle East will trigger a sharp economic slowdown prompted traders to dial back bets on higher interest rates. Brent hit $115 a barrel.
US yields fell across the curve after money markets cut the odds of a Federal Reserve rate hike in 2026 to about 25%, from around 35% on Friday. The rate on two-year Treasuries dropped three basis points to 3.88%. S&P 500 futures climbed 0.5% after the benchmark slumped to an August low at the end of last week. The dollar was little changed.
The moves came after missile strikes ripped across the Middle East over the weekend as Iran and its proxies launched attacks on US allies. The arrival of a US amphibious assault group and the entry of Iran-backed Houthi forces heightened fears of escalation after a month of fighting.
While traders have so far largely focused on the inflationary shock from rising oil prices, sending the Treasury market toward its deepest monthly loss since October 2024, some of Wall Street’s biggest bond-fund managers said yields will slide as the war’s impact on growth becomes more apparent.
“While inflation remains a concern, the potential drag on growth and confidence should start to act as an offset, limiting further upside in yields,” said Francisco Simón, European head of strategy at Santander Asset Management. “Together with oil, we think the bond market is currently one of the clearest expressions of how markets are pricing the impact of the conflict on the macro outlook.”
In Europe, the Stoxx 600 advanced 0.5% as bond markets strengthened as well, although the slide-down in yields was less pronounced than in the US. Money markets now see the probability of an European Central Bank rate hike next month at about 60%. It was fully priced a week ago.
The yen rose against all its Group-of-10 peers after Japan’s currency chief Atsushi Mimura said the nation may take bold action in the foreign-exchange market. Aluminum advvanced 4% after Iran’s weekend strikes on Middle Eastern smelters. Gold steadied after its first weekly gain since the war began.
Oil may hit a record $200 a barrel if the Iran war drags on until June, with the Strait of Hormuz remaining shut, Macquarie Group Ltd. warned. A conflict that stretches through the second quarter would result in historically high real prices, analysts including Vikas Dwivedi said in a note, outlining a scenario with odds of 40%.
An alternative outlook, with a probability of 60%, suggested the war may finish at the end of this month, they said.