US Treasury yields drop from 2002 peak as oil prices ease

Yields on 10-year notes declined by three basis points to 5.28%, while two-year yields dropped about two basis points to 4.8%. The move marked a pause in the global bond selloff that had been fueled by inflation fears linked to the US-Iran conflict and expectations of tighter Federal Reserve policy.

Bessent, speaking at a fireside chat in Pennsylvania on Monday evening, said the government would begin "bending that curve" of rising borrowing, asserting that a combination of growth and fiscal restraint would quickly alter the path of US debt accumulation.

The yield shift came after a $58 billion auction of three-year notes cleared at 4.932%, just below the pre-auction level of 4.934%. Direct bidders, including large investment funds that trade without dealers, took 31.7% of the offering — the second-largest share on record for such participants.

Despite the short-term relief, concerns remain over the US fiscal outlook. Bridgewater Associates founder Ray Dalio warned the country is nearing the limits of its debt cycle and could face a crisis within three years if spending continues to exceed revenue. He also highlighted vulnerability to reduced demand from China and Japan, two of America’s largest foreign creditors.

Market participants remain skeptical of Bessent’s ability to deliver meaningful fiscal reform soon. Gareth Berry of Macquarie noted that with the deficit at 6% and no concrete plan to reduce it, statements of intent are insufficient.

Analysts suggest the near-term direction of bond markets will hinge on energy prices. James Ringer of Schroders said a meaningful rally across the yield curve requires declining prices not only for crude oil but also for refined products like diesel.

HSBC strategists expect longer-term bonds to underperform, forecasting a widening spread between five- and 30-year Treasury yields. They also described current market pricing for around 80 basis points of Federal Reserve rate hikes over the next year as excessive.

Until clearer signs emerge that high interest rates are constraining economic activity, a sustained Treasury rally appears unlikely, especially given the limited economic data expected in the coming week.