U.S., European, and Japanese government bonds all rose, as the market speculates that the Iran war may soon come to an end.

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As U.S. President Trump hinted that the Iran war could end within weeks, global government bond markets rallied across the board on Wednesday, oil prices plunged sharply, investors quickly repriced rate hike expectations, and concerns over the month-long global energy crisis eased significantly.

Yields on UK gilts and French, Italian, and other eurozone government bonds fell by more than 10 basis points; the yield on Germany’s 10-year benchmark bond dropped 6 basis points to 2.94%, hitting a new low since March 18. Meanwhile, the yields on U.S. 2-year and 10-year Treasuries fell as much as 6 basis points to 3.73% and 4.26%, respectively. The yield on Japan’s 40-year government bond fell 12 basis points to 3.795%.

According to Xinhua News Agency, on the evening of March 31, U.S. President Trump said at the White House that the U.S. would end the war with Iran “within two to three weeks” and could reach an agreement with Iran before that. According to CCTV News, Iranian President Pezeshkian said Iran was willing to end the war, but only if its demands were met, especially guarantees that it would no longer suffer aggression. Trump’s remarks have reignited market optimism for easing tensions.

Market bets on rate hikes quickly retreated. The probability of a European Central Bank rate hike in April has dropped below 50%, while the probability for the Bank of England has fallen to about one-third. The U.S. dollar spot index fell as much as 0.4%; previously, U.S. dollar long positions accumulated due to the Iran war are beginning to unwind.

Rate Hike Expectations Cool Sharply

Expectations of easing in the Iran situation have directly impacted market assessments of the monetary policy paths of major central banks. For the full year, the market is currently pricing in cumulative rate hikes of about 60 basis points for the European Central Bank and 43 basis points for the Bank of England, both the lowest since mid-March.

After the outbreak of the Iran war, Middle East energy exports suffered severe disruptions, inflation expectations surged, and markets once heavily bet that the ECB and BOE would continue to raise rates. This reversal in expectations shows that bond investors are repositioning for a potential policy shift.

The U.S. Treasury market also benefited. Bloomberg’s U.S. Government Bond Total Return Index fell 1.7% in March, the largest monthly drop since the end of 2024, but the recent decline in yields signals a significant shift in market sentiment.

Kenta Inoue, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo, said: “For Trump, with support rates starting to fall and risks rising, he cannot afford the cost of a protracted conflict.” He expects that as energy crisis concerns fade, “the short end of the yield curve is likely to fall to reflect the Fed’s rate cut expectations, while the long end will find it difficult to rise further.”

Uncertainties Remain, Market Stays Cautious

Since the start of the Iran war, the U.S. dollar has been the biggest winner in the FX market, accumulating one of the largest long positions. With expectations for the end of the war rising, this trading logic is being put to the test.

Valentin Marinov, head of G-10 FX research and strategy at Crédit Agricole, said: “The dollar stood out during the Iran war, becoming the biggest long position in the FX market, and we are now seeing some of those longs being closed out.”

Despite the obvious improvement in market sentiment, analysts warn that there are still many unresolved uncertainties. According to a report by ING strategists including Benjamin Schroeder:

“After messages are exchanged between the parties to the conflict, the market will be watching closely to see if this can open a path toward de-escalation.”

The team also raised a key question: “Given the damage already caused by the war, how quickly energy flows can fully recover remains an open question.” This means that even if a ceasefire is reached, normalization in the energy market may still take time, and inflationary pressures may not ease rapidly.

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