U.S. Treasury yields fell sharply on Wednesday as reports of a potential Middle East ceasefire eased oil price pressures and revived expectations of Federal Reserve rate cuts later this year. The benchmark 10-year yield dropped 12 basis points to 4.32%, its lowest level in three weeks, while oil prices declined nearly 3% following diplomatic progress in Gaza ceasefire talks.
The bond market rally reflects growing investor confidence that cooling energy prices could help moderate inflation, giving the Fed room to begin cutting interest rates as early as September. Analysts note the correlation between oil prices and inflation expectations has strengthened since Russia’s invasion of Ukraine in 2022. ‘The ceasefire news removes a major upside risk to inflation,’ said a senior fixed-income strategist at a major Wall Street bank who declined to be named discussing market-sensitive topics.
Fed funds futures now price in nearly two full rate cuts by December, up from just one cut priced in last week. The shift comes despite recent hawkish commentary from some Fed officials, including Governor Christopher Waller’s Tuesday remarks that policymakers need ‘several more months’ of good inflation data before considering cuts. Market participants appear to be looking past such warnings, focusing instead on the potential for slowing economic growth. Second-quarter GDP estimates have been revised downward to 1.8% annualized growth, according to the Atlanta Fed’s GDPNow tracker.
Some analysts caution that the market may be getting ahead of itself. ‘The Fed has consistently said they want to see sustained progress on inflation before cutting,’ noted Diane Swonk, chief economist at KPMG. ‘One month of better oil prices doesn’t solve the services inflation problem.’ Traders will get fresh clues on Friday when the Commerce Department releases the Fed’s preferred inflation gauge, the core PCE price index.