Treasury Yields Reverse Course as Trump Signals Possible End to Iran Tensions

Treasury yields reversed course on Monday after emerging reports indicated that Donald Trump signaled a potential end to military hostilities with Iran, prompting a swift reassessment of geopolitical risk. The 2-year Treasury note yield fell from a session high of 4.99% to close at 4.87%, while the 10-year yield retreated to 4.53%. The 2s10s spread narrowed to 34 basis points, reflecting reduced expectations for sustained rate hikes and a recalibration of inflation outlook. The shift was driven by a sudden drop in risk appetite metrics: the CBOE Volatility Index (^VIX) plunged 14.8% to 16.2, its lowest level since early February, signaling improved market confidence. Meanwhile, crude oil prices (CL=F) dropped 3.2% to $87.40 per barrel as fears of supply disruption from the Middle East eased, reinforcing the risk-off reversal. The reversal underscores how quickly market sentiment can pivot on geopolitical headlines. Prior to the report, oil had surged 5.7% on concerns about regional instability, pushing inflation expectations higher and pressuring Treasury yields. The energy sector, which had seen gains in defense-linked equities and oil futures, saw a pullback as the perceived threat of conflict diminished. Investors are now reassessing the trajectory of Federal Reserve policy. With inflation pressures easing and risk premia collapsing, expectations for a June rate hike have cooled, with futures pricing in a 61% probability, down from 78% earlier in the week. The defense sector, particularly companies tied to Middle East operations, saw moderate declines, while broader equity indices registered gains as Treasury demand surged.