A U.S.-Iran agreement could reopen the Strait of Hormuz, putting the waterway back at the center of market attention. But a resumption of traffic would not necessarily reverse the supply pressures facing the U.S. Treasury market. Energy transport, U.S. government financing needs and the path of long-term interest rates are all shaping market conditions, making it difficult for any single geopolitical development to determine the direction of the 10-year Treasury yield.
Hormuz reopening would be only one market variable
The United Nations General Assembly in New York is drawing all 193 member states this week. Whether Iran attends, and what signals it sends, has attracted additional attention because of the potential implications for U.S.-Iran relations and shipping through the Strait of Hormuz.
If Washington and Tehran reach an agreement, restored passage through the strait could ease concerns about disruptions to crude oil transportation. The market impact, however, should not be overstated. Lower energy-transport risk would first affect expectations for oil supplies and inflation trading; it would not directly resolve the continued increase in U.S. Treasury issuance.
Saudi Arabia has restarted its alternative pipeline
Saudi Arabia has resumed operations on its East-West pipeline, which has an estimated capacity of about 5 million barrels per day. The route can bypass the Strait of Hormuz to some extent and reduce part of the oil market's reliance on the waterway.
That means energy markets would still have an alternative transport route even if conditions in the strait change. The pipeline's operating status, actual throughput and the pace at which maritime shipping resumes will help determine whether expectations for crude supply continue to improve. Saudi Arabia's bypass capacity is now a factor markets must include when assessing the risks around Hormuz.
Treasury supply pressure remains in place
The Treasury market is also under pressure from the U.S. government's financing needs. Primary dealers estimate that, based on the current issuance trend, the U.S. Treasury financing gap could reach $1.45 trillion by fiscal 2028.
That estimate points to a medium-term supply issue rather than a short-lived move caused by a single week or geopolitical event. Even if the Strait of Hormuz reopens and energy-price pressure eases, the scale of fiscal financing and Treasury issuance could continue to influence the term premium demanded by investors. For bond markets, whether new supply can be absorbed smoothly remains a more durable issue than any single diplomatic development.
A sustained break below 4% looks difficult
Against this backdrop, the outlook for the 10-year U.S. Treasury yield cannot be assessed solely through the lens of developments involving Iran. Current estimates indicate that, regardless of how the situation involving Iran evolves, the 10-year yield is unlikely to remain below 4% over the next three to six months.
This does not mean yields cannot fall temporarily on safe-haven demand, lower energy prices or changing policy expectations. Rather, with Treasury supply continuing to rise, a sustained move below 4% would require broader and more persistent downward pressure on interest rates. A reopening of the Strait of Hormuz could alter some energy and inflation expectations, but the U.S. fiscal financing gap, the pace of Treasury issuance and demand for longer-dated bonds would continue to shape market pricing.
As investors monitor Iran's participation in the U.N. General Assembly and developments in U.S.-Iran relations, they will also need to track the performance of Saudi Arabia's alternative pipeline, the pace of Treasury issuance and whether the 10-year yield records a sustained move. Based on the information currently available, improved passage through the strait has not removed the Treasury market's medium-term supply pressure.