Treasuries Rally as Trump Signals Iran Deal Progress
0h ago|4 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
treasuriesbondsgeopolitics
Fazen Markets Editorial Desk
Collective editorial team · methodology
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U.S. Treasury prices rallied sharply on Tuesday, May 26, 2026, as cash trading resumed after the Memorial Day holiday. The primary catalyst was a signal from former President Donald Trump, reported by Bloomberg that morning, indicating significant progress in negotiations toward a new U.S.-Iran nuclear accord. The benchmark 10-year yield fell 10 basis points to 3.78%, while the 2-year yield dropped 8 basis points to 3.42%. This move reversed a pre-holiday selloff and marked the largest single-day yield decline in three weeks.
Treasury markets were in a state of heightened sensitivity to geopolitical risk prior to this development. U.S. yields had been trending higher for the month, with the 10-year trading near 4.00%, as markets priced in persistent inflation and a patient Federal Reserve. A comparable rally occurred on November 24, 2023, when a temporary Israel-Hamas ceasefire spurred a 15-basis-point drop in the 10-year yield over two sessions, demonstrating the market's acute reaction to Middle Eastern de-escalation.
The immediate trigger is a shift in the political landscape surrounding Iran policy. The Trump administration, which originally withdrew from the Joint Comprehensive Plan of Action in 2018, is now positioned to broker a successor agreement. Progress suggests a potential reduction in regional conflict risk, a key overhang for global risk sentiment and energy markets since the escalation of proxy conflicts earlier in the decade.
This news arrives during a period of thin liquidity following a U.S. market holiday, which can amplify price moves. It also precedes critical economic data releases, including the Personal Consumption Expenditures price index, forcing investors to reassess growth and inflation expectations against a changing geopolitical backdrop.
The rally was broad-based across the Treasury curve. The 30-year bond yield fell 11 basis points to 3.95%. The yield on the inflation-protected 10-year TIPS declined 7 basis points to 1.63%, indicating a drop in both nominal rates and inflation expectations. Trading volume in Treasury futures was 18% above the 20-day average, confirming substantive institutional participation.
| Security | Yield Before Holiday (May 23 Close) | Yield May 26 Close | Change (bps) |
|---|---|---|---|
| 2-Year Treasury | 3.50% | 3.42% | -8 |
| 10-Year Treasury | 3.88% | 3.78% | -10 |
| 30-Year Treasury | 4.06% | 3.95% | -11 |
The curve, measured by the 10s2s spread, steepened slightly to 36 basis points from 38 basis points, as longer-dated bonds outperformed. This contrasts with the S&P 500, which opened higher but pared gains to close up only 0.3%. The iShares 20+ Year Treasury Bond ETF (TLT) surged 1.8% on the day, its best performance since early April. The U.S. Dollar Index (DXY) weakened by 0.4% to 104.20 as the safety bid for the dollar eased.
The primary market mechanism is a reduction in the geopolitical risk premium embedded in government bond yields. A deal with Iran would lower the probability of a supply shock in the global oil market, a major inflationary threat. Consequently, energy sector equities underperformed; the Energy Select Sector SPDR Fund (XLE) fell 1.2% as West Texas Intermediate crude oil futures dropped 2.8% to $74.50 per barrel.
Defense contractors with significant exposure to Middle East procurement, such as Lockheed Martin (LMT) and Northrop Grumman (NOC), saw shares decline 1.5% and 1.8%, respectively, on reduced conflict anticipation. Conversely, sectors sensitive to lower input costs and interest rates rallied. Homebuilders like D.R. Horton (DHI) and Lennar (LEN) gained over 2%, and the iShares U.S. Home Construction ETF (ITB) rose 1.9%.
The counter-argument is that any deal faces significant legislative and implementation hurdles, and past agreements have unraveled. The initial market move may overestimate the speed and certainty of a final resolution. Flow data indicates macro hedge funds and commodity trading advisers were covering short Treasury positions established during the recent selloff, while real money asset allocators were buyers of intermediate duration.
The immediate focus shifts to the wording and scope of any formal framework announced by U.S. and Iranian officials. Key dates include the next meeting of the International Atomic Energy Agency Board of Governors on June 5 and the OPEC+ meeting on June 4, where producers may adjust output quotas in response to the new geopolitical outlook.
For Treasury yields, the 3.75% level on the 10-year note now serves as pivotal support. A sustained break below could target the 3.65% area, last seen in mid-April. Resistance stands at the pre-news level of 3.88%. Market pricing for the July 31 Federal Reserve meeting will be scrutinized; the current probability of a rate cut shifted from 32% to 38% following the rally.
Secondary effects will manifest in currency markets, particularly for the Iranian rial and regional currencies like the Israeli shekel. Watch for commentary from Saudi Arabia and other Gulf Cooperation Council members, as a U.S.-Iran détente could recalibrate long-standing regional alliances and energy policies.
Historical precedent shows a material impact. When the original JCPOA was implemented in January 2016, global benchmark Brent crude oil fell approximately 30% over the preceding six months in anticipation of renewed Iranian exports. Analysts estimate a new deal could return 1.0 to 1.5 million barrels per day of Iranian oil to the formal market within 12 months, exerting sustained downward pressure on prices and benefiting sectors like transportation and manufacturing.
The rally in TIPS indicates the market perceives the deal as disinflationary, primarily via lower energy costs. The 10-year breakeven inflation rate, derived from the yield difference between nominal Treasuries and TIPS, compressed by 3 basis points to 2.15%. This suggests investors see reduced upside risk to the Consumer Price Index, potentially allowing the Federal Reserve more flexibility to consider rate cuts later in 2026, which supports longer-duration TIPS valuations.
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