Bond traders drastically shift Fed rate-hike bets

Bond traders took a beat on their interest-rate hike forecasts as the White House signaled a peace agreement was underway to end the U.S.-Iran war.

Futures traders lowered their expectations June 15 of an increase in the benchmark Federal Funds Rate in December of this year.

The needle moved from near 90% probability to almost 60%, according to the widely watched CME Group FedWatch Tool. 

J.P. Morgan Chase Head of Cross-Asset Strategy Fabio Bassi told Bloomberg that traders “believe the decline in oil price will reduce the need of more aggressive hikes by the developed market central banks.”

But Bassi added that “investors are used to the ebb and flow of the news in the Middle East and therefore a lingering skepticism remains.” 

The shift came one day before new Federal Reserve Chair Kevin Warshmakes his debut as head of the world’s largest central bank in his first policymaking Federal Open Market Committee meeting.

Nervous bond traders had drastically upped the ante on a Fed rate hike since early May as the war dragged on, oil prices surged, and consumer prices continued to spike.

But the potential reopening of the Strait of Hormuz and a decline in crude oil prices sparked investor optimism that the energy shocks driving U.S. inflation over the past three months will not have a long-term impact on price pressures.

Treasury yields dip as traders pull back Fed rate-hike bets

The $31 trillion U.S. Treasury market is also the global benchmark for borrowing costs and emerging-market assets, Bloomberg reported.

Yields on Treasury two-year bonds dropped as much as seven basis points to 4.01% on June 15. 

• The benchmark 10-year notes, which influence U.S. mortgage rates, dropped by six basis points to 4.42%. 
• Yields on 30-year bonds declined as much as five basis points to 4.92%, the lowest since May 7. 

“In bond markets, based on the observed postwar correlations, a 10% decline in oil prices would lead to an approximate 13-basis point decline in U.S. 10-year Treasury yields,” Tomo Kinoshita, a global market strategist at Invesco Asset Management Japan Ltd, told Bloomberg.

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Fed mandate requires a tricky balance

The Fed’s dual mandate from Congress requires maximum employment and stable prices.

• Lower interest rates support hiring but can fuel inflation. This risks fueling further inflation, potentially leading to an inflationary spiral.
• Higher rates cool prices but can weaken the job market. This increases the cost of borrowing and further stifles economic activity.

The FOMC continued to hold the funds rate steady at 3.50% to 3.75% during its April 30 meeting.

Related: Iran peace deal resets gas prices

This came after policymakers made three quarter-point cuts at its last three meetings of 2025 to shore up the softening labor market. 

The cuts stopped after the majority of policymakers decided the risk from higher prices was outweighing signs that the jobs market was stabilizing.

Bond yields rally across the globe

Yields also dropped throughout Europe as traders trimmed rate hike bets for both the Bank of England, set to meet on June 18, and the ECB, which raised rates by a quarter point last week. Asian bond markets also rallied.

“Some of the short positioning in rates will be taken off,” Matthew Haupt, a hedge fund manager at Wilson Asset Management in Sydney, told Bloomberg.

“Central banks can now be less hawkish, as they can afford to wait and look through any short-term inflation,” Haupt said. 

As I’ve reported, the CME Group FedWatch Tool, along with many economists and other market analysts, expect the Fed to hold rates steady again at 3.50% to 3.75% at the June 16-17 meeting.

Related: Warsh’s first Fed meeting resets interest rate-cut bets