- Iran's seizure of two container ships in the Strait of Hormuz has sharply escalated geopolitical tensions, driving WTI crude futures to close up 3.67% at $92.96 per barrel.
- Despite the resurgence of energy price pressures, the U.S. bond market remained relatively calm, with the 10-year Treasury yield edging up to 4.294%, reflecting investors' cautious wait-and-see approach regarding the conflict's duration.
- The Treasury's $13 billion 20-year bond auction saw strong demand, with winning yields below pre-issue rates, indicating the fixed-income market's robust absorption capacity for long-term assets.
Haven Logic Amid Strait of Hormuz Conflict
On Wednesday, Iran seized two container ships after opening fire, breaking the relative calm with the U.S. and Israel since February this year. While the oil market quickly priced in a risk premium, the bond market reaction was asymmetrical. The benchmark 10-year U.S. Treasury yield did not decline sharply in risk-averse sentiment, instead hovering at high levels due to potential inflation pressures. Market participants are assessing whether this incident will develop from a single seizure into a prolonged blockade of the global energy transport artery.
Term Spread and Reconstructed Inflation Expectations
For the third consecutive trading day, the yield curve showed a slight flattening trend, with the 2-year/10-year U.S. Treasury yield spread narrowing to 49.8 basis points. This pattern reflects deep market concerns over inflation stickiness. Should energy prices remain above $90, their additional contribution to inflation could force interest rates to stay elevated for a longer period. Analysts note that a 10% increase in oil prices typically results in about 20 to 25 basis points of potential inflation pressure, implying that if oil prices rise further, the bond market may face more severe pricing corrections.
Aftermath of Federal Reserve Chair Nominee Hearing
The market is also digesting remarks from Federal Reserve Chair nominee Kevin Warsh at the Senate Finance Committee. Warsh emphasized the need for monetary policy to remain independent and unaffected by political factors. Despite the ongoing investigation by the Department of Justice into current Chairman Powell, Warsh suggested a future policy framework that includes reducing the balance sheet to reclaim liquidity while maintaining caution in adjusting benchmark rates. This anticipated policy mix has added defensive support to long-term yields.
Resilient Demand for 20-Year Treasury Auction
Amid high macroeconomic uncertainty, the $13 billion 20-year Treasury auction held on Wednesday served as a crucial indicator of market depth. The auction results were unexpectedly robust, with a 4.883% winning yield lower than anticipated at bidding closure, indicating institutional investors did not demand extra risk premiums. Although the bid-to-cover ratio at 2.68 was slightly below the last instance, it remained above the recent average, demonstrating stable allocation demand for long-duration assets from pension funds and insurance companies in uncertain interest rate scenarios.
