U.S. government bond yields moved lower on Friday after Iran and the United States signaled that the Strait of Hormuz would be reopened temporarily during a pause in hostilities connected to a 10-day ceasefire between Israel and Lebanon. Market participants interpreted the development as a reduction in the near-term risk to global oil shipments through the strategic waterway.
In a post on X, Iran's foreign minister Abbas Araghchi stated that, "In line with the ceasefire in Lebanon, the passage for all commercial vessels through Strait of Hormuz is declared completely open for the remaining period of ceasefire." U.S. President Donald Trump also highlighted the move on social media, writing that "IRAN HAS JUST ANNOUNCED THAT THE STRAIT OF IRAN IS FULLY OPEN AND READY FOR FULL PASSAGE. THANK YOU!"
The ceasefire, announced earlier by President Trump and set to last 10 days, appeared to be holding on Friday afternoon. Continued Israeli strikes on Hezbollah sites in Lebanon had been identified as a central obstacle in talks between Iran and the United States.
Trump indicated that diplomatic engagement with Tehran may restart over the weekend, saying negotiations between Washington and Tehran were "very close" to producing a deal. He added that Iran had agreed not to possess a nuclear weapon for more than 20 years, a point the U.S. has cited as a key objective. Iran, according to the public record cited in the markets, has sought relief from international sanctions in return.
The president also said he might extend the temporary ceasefire - which is due to expire later this month - if Washington and Tehran neared an agreement that would justify prolonging the pause in fighting.
Media reporting cited officials familiar with the matter as saying both sides were discussing a three-page plan intended to end the conflict. One element described in those reports included the U.S. releasing $20 billion in frozen Iranian funds in exchange for Iran relinquishing its enriched uranium.
Markets reacted to both the reported diplomatic progress and the reopening of the Strait of Hormuz. The prospect of fewer disruptions to energy flows, together with signs that negotiations might advance, reinforced wagers that the Federal Reserve could be in a position to cut interest rates later in the year.
Investors had been contending with an energy shock tied to the conflict, which had raised concerns about higher inflation and the potential for central banks globally to raise interest rates in response. After the announcement on the strait, oil prices dropped back below $90 per barrel, though they remained above the levels seen before the outbreak of hostilities.
By 10:22 a.m. ET (14:22 GMT), the benchmark 10-year U.S. Treasury yield had declined by 80 basis points to 4.232%, while the 2-year Treasury - which generally moves more in step with expectations for Federal Reserve policy - fell by 72 basis points to 3.706%.
Market implications
- Fixed income: The sharp drop in short- and intermediate-term yields reflected recalibrated expectations for Fed policy following the reduced near-term energy risk.
- Energy: Crude futures fell below $90 a barrel on news of the reopening, though prices remain elevated relative to pre-conflict levels.
- Geopolitics and trade: A temporary reopening of the Strait of Hormuz eases an acute logistical choke point for commercial shipping during the ceasefire.
What remains uncertain
- The durability of the ceasefire: While it appeared to be holding on Friday afternoon, the pause in hostilities is time-limited and could be extended only if negotiators reach satisfactory terms.
- The outcome of talks between Washington and Tehran: Officials have been reported to be close to a deal, but the negotiations involve complex exchanges, including the potential release of $20 billion in frozen funds and limits on enriched uranium.
- Inflationary pressure: Although oil prices fell after the reopening was announced, they remain higher than pre-conflict levels, leaving upside inflation risk should supplies be disrupted again.
This report reflects statements and figures made public during the events described, including social-media statements by Iran's foreign minister and the U.S. president, and market prices and yields observed at the time noted.