Iran situation impacts US Treasuries! Third weak auction this week, US bond decline intensifies

Thursday saw a decline in U.S. Treasury bonds after the U.S. government held three consecutive poorly received Treasury auctions, reflecting weak demand and highlighting investors’ fatigue with market volatility. This volatility stems from the failure of diplomatic efforts to end U.S. military action in Iran. The U.S. Treasury market’s size stands at $31 trillion. The decline in this market widened further after Thursday’s seven-year Treasury auction. By Thursday's close in New York, the benchmark 10-year Treasury yield rose by 7.95 basis points to 4.4117%, trading in a range of 4.3361%–4.4256% throughout the day. The two-year Treasury yield rose by 10.05 basis points to 3.9858%, with intraday trading between 3.8914% and 3.9981%. The yields of the 2-year, 5-year, and 7-year Treasury bonds issued this week were all higher than prevailing market levels at the close of the auction—the first time this has happened since May 2024, marking the poorest auction performance in a month. In May 2024, traders were also reducing their bets on Fed rate cuts. Industry insiders said: "We have seen sharp intraday swings at unexpected times due to various headlines. This makes people reluctant to take on extra risk. In such an environment, it becomes harder to smoothly digest large-scale liquidity events like auctions." This week, the U.S. government issued a total of $183 billion in fixed-rate bonds, completing its monthly issuance plan. The winning yield of the 7-year Treasury bond was 4.255%, higher than similar bonds’ 4.247% yield at the close of the auction. The demand for the 2-year and 5-year bonds issued earlier this week was even weaker. The sluggish demand comes amid uncertainties over the duration and economic impact of the conflict in the Middle East, which has pushed up energy prices and forced traders to reassess expectations for the Fed's policy path. Since the U.S. military action on February 28 disrupted supplies in the Middle East, Treasury yields have generally moved closely in tandem with oil prices. Due to the outlook for rising inflation, traders have abandoned bets on Fed rate cuts this year and have even started to price in rate hikes, adding extra pressure on Treasuries. Last week, U.S. benchmark crude closed near the $100 per barrel level and fell on Monday after Trump claimed progress in ending the war. However, after Trump threatened an intensification of attacks, oil prices spiked 5.5% to about $95 on Thursday. Subsequently, Trump extended Iran’s deadline to reopen the Strait of Hormuz to April 6 and stated negotiations were "going very well". Earlier this week, the global bond market rallied on the possibility of easing U.S.-Iran tensions, but after the deal was rejected and threats escalated again, the market resumed its decline. Morgan Stanley’s rate strategists said this week that market volatility has also increased trading costs, especially for shorter-term bonds. This may be one of the reasons for the weak auction performance this week. Risk Warning and Disclaimer The market carries risk and investment should be approached with caution. This article does not constitute personal investment advice, nor does it take into account individual users’ specific investment goals, financial conditions, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their specific circumstances. Investment decisions based on this article are solely at your own risk.