Treasuries Rally 4.2% in Best Week Since War on Iran Began
2h ago|3 min readQuick Read
Fazen Markets Editorial Desk
Collective editorial team · methodology
treasuriesbond-rally
Fazen Markets Editorial Desk
Collective editorial team · methodology
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The US Treasury market is on track for its strongest weekly performance since the onset of the US war on Iran, with the Bloomberg US Treasury Index advancing 4.2% for the week ending May 29, 2026. This surge in bond prices, which equates to a significant drop in yields, coincides with a 9% weekly decline in Brent crude oil futures. The move is driven by market expectations that a ceasefire agreement could be reached, potentially de-escalating regional conflict and easing inflationary pressures.
The current rally marks the most substantial weekly gain for US government bonds since the conflict began in late 2025. The last comparable rally of this magnitude occurred in March 2026, when a tentative diplomatic breakthrough spurred a 3.8% weekly gain. This performance is a sharp reversal from the persistent selloff that characterized the first quarter of 2026, driven by war-induced inflation fears.
The macro backdrop features the Federal Funds target rate at 5.75%, a level maintained by the Fed throughout the initial conflict phase to combat inflation. The catalyst for this week's move is a series of confirmed diplomatic communications between US and Iranian officials, suggesting a high probability of a formal ceasefire announcement. This development directly impacts the inflation outlook, as lower oil prices reduce input costs across the economy.
The yield on the benchmark 10-year US Treasury note fell 32 basis points this week to 3.92%, its lowest level in eight weeks. The more rate-sensitive 2-year Treasury yield declined 28 basis points to 4.55%. The Treasury market's rally far outpaced the S&P 500's modest 0.8% gain for the same period.
The Bloomberg US Treasury Index's 4.2% weekly return is its strongest since the war's inception. Long-dated bonds led the advance, with the iShares 20+ Year Treasury Bond ETF (TLT) rising 6.1% this week. Trading volume across the Treasury complex surged to a 30-day average of $612 billion, 22% above the monthly mean.
| Metric | Start of Week | End of Week | Change |
|---|---|---|---|
| 10Y Yield | 4.24% | 3.92% | -32 bps |
| Brent Crude | $98/bbl | $89/bbl | -9.2% |
The bond rally creates immediate winners and losers across asset classes. Interest-rate sensitive equity sectors like real estate and utilities outperformed, with the Vanguard Real Estate ETF (VNQ) gaining 4.3%. Technology stocks also benefited from lower discount rates on future earnings, lifting the Nasdaq Composite by 2.1%. Conversely, energy equities faced substantial selling pressure, with the Energy Select Sector SPDR Fund (XLE) dropping 5.7%.
A primary risk to this rally is the possibility of ceasefire talks collapsing, which would likely trigger a rapid reversal in both bond and oil markets. Institutional flow data indicates real money buyers are leading the Treasury purchases, while hedge funds have been covering short positions in interest rate futures. Pension fund rebalancing activity also contributed to the week's strong bid for duration.
Markets will closely monitor the official ceasefire announcement, which diplomatic sources suggest could occur by June 5, 2026. The May US employment report on June 6 will provide crucial data on whether the labor market is cooling sufficiently to justify maintaining current rate levels.
Key technical levels include 3.85% yield support on the 10-year note, a breach of which could target the 200-day moving average at 3.72%. For oil, the $85 per barrel level represents critical support; a break below could accelerate the decline. The Fed's June 17 meeting will be pivotal for assessing whether recent disinflationary trends alter their communicated hawkish stance.
The sharp decline in Treasury yields typically translates to lower mortgage rates within days. The average 30-year fixed mortgage rate could fall approximately 25 basis points from its recent peak of 7.2%, making housing more affordable. This development particularly benefits homebuilder stocks and mortgage REITs that hedge their duration exposure effectively.
A breakdown in ceasefire negotiations would likely cause an immediate reversal of the week's gains, potentially pushing yields back above 4.2%. The market would reprice inflation expectations higher, and the flight-to-quality trade would be overwhelmed by concerns about prolonged conflict and its impact on energy prices and economic growth.
Commitments of Traders data indicates that leveraged funds remain net short Treasury futures despite covering some positions this week. This suggests potential for further rallying if these participants are forced to cover remaining shorts. Real money accounts, including insurance companies and pension funds, are adding duration exposure as yields approach 4%.
The Treasury market's best week since the war began signals a fundamental repricing of geopolitical risk and inflation expectations.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
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