BNY’s Geoff Yu notes that expectations of progress toward peace in Iran are driving a bond rally and shaping flows in the United States (US) Treasury market. As Oil prices fall and real rates reprice, he argues exporter surpluses and reserve management trends could again favor the US Dollar (USD). The report stresses that recent US real-rate selling reflects liquidity needs rather than fiscal or inflation fears.

Treasury flows and conflict repricing

"A true end to the Iran conflict may still be some way off, but the market is increasingly confident that this is the broader direction. Yesterday’s news of a potential memo to this effect has driven a strong move in bond markets. As oil prices decline and fears over inflation ease, we would naturally expect a decent move in bonds as real rates reprice globally, almost without exception."

"The U.S. Treasury market has also reacted strongly to hopes of an end to the conflict, just as the foreign vs. domestic gap is starting to close. On the real rates side, we stress that the sales seen through the last six weeks are still a function of liquidity needs rather than worries over U.S fiscal conditions or inflation-driven steepening, even though those factors will need to feature more heavily over the medium term."

"By default, if oil prices ease, exporter surpluses could rise from here and normal service will resume in reserve management trends, which will continue to heavily favor the dollar’s performance."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)