Bond traders boosted wagers that the Federal Reserve will lower interest rates this year as a U.S.-Iran ceasefire sent oil tumbling.

Treasuries rallied along with other government debt markets, paring losses since the war began Feb. 28. The energy price surge it caused threatened to stoke inflation and cause central banks either to delay interest-rate cuts or to raise rates.

In the case of the Fed, the oil shock evaporated expectations for two-quarter point cuts this year, and briefly stoked wagers on a hike. Wednesday’s rally saw swap contracts price in a roughly one-in-three chance of a cut, up from near zero at the start of the week.

“Treasuries have taken the ceasefire announcement in stride, with investors restoring rate cuts for 2026 and rates moving lower amid expectations that inflationary pressures could ease,” said Gennadiy Goldberg, head of U.S. interest rates strategy at TD Securities.

U.S. yields declined by less than three basis points, trailing steeper yield declines in most European bond markets, reflecting the region’s greater exposure to soaring energy prices. The U.S. 10-year yield was lower by about two basis points near 4.27%, the lowest since mid-March, versus declines of at least 10 basis points for most European counterparts.

Short-maturity euro-zone and UK yields plunged as traders slashed wagers on interest-rate hikes by the European Central Bank and Bank of England. As part of the two-week truce, Tehran agreed to reopen the Strait of Hormuz, a crucial transit route for oil and gas shipments. Crude prices plunged.

“You can take out more hikes from the European central banks,” Myles Bradshaw, head of global aggregate strategies at JPMorgan Asset Management, said on Bloomberg TV. “The inflation shock is relatively small and what’s uncertain is the growth shock,” he added, saying the economy was in a more vulnerable position than when Russia invaded Ukraine in 2022. “I think in that world, central banks will err on the side of caution.”

Markets had been pricing stable or falling rates in Europe before the war stoked concerns that inflation would accelerate globally. Since the U.S. launched strikes against Iran on Feb. 28, yields in Europe soared to multi-year highs and gauges of market volatility posted a record surge. U.S. Treasuries also sold off sharply, leading Treasuries to post their biggest monthly loss since October 2024 in March.

Inflation expectations fell sharply Wednesday, spurring the bid in bonds. A proxy for euro area price growth over the next 10 years dropped to 2.1%, almost fully erasing the sharp jump since the start of the war. Swaps now imply around a 30% chance that the ECB will hike rates by a quarter-point later this month, down from 70% on Tuesday.

“If the ceasefire gets extended, an ECB rate hike in April, and beyond, becomes unlikely,” said Christoph Rieger, head of fixed income and credit research at Commerzbank AG.

Risks remain

Oil fell the most in almost six years after Trump announced the truce, which came roughly 90 minutes before his deadline for Iran to reopen the strait or face a massive military bombardment.

But while falling energy costs should ease the pressure on policymakers to act to keep inflation in check, some investors say it is too soon to sound the all-clear.

“A lot of negotiation needs to take place before we can say this is over,” said Matthew Amis, an investment manager at Aberdeen. “Markets are going to be even more sensitive to headline risk over the next two weeks, therefore this doesn’t feel like a one way move in yields just yet.”

Gulf nations continued to report attacks on Wednesday, and it’s not yet clear under what terms ships can pass through the Strait of Hormuz. Meanwhile, the Israeli army also halted attacks against Iran, but it remains on high alert to respond to any violation of the ceasefire, an IDF spokesperson said on X.

“I really do think both sides are looking for an offramp but I’m not sure we’re 100% there yet,” said Win Thin, chief economist at Bank of Nassau 1982. “It feels like markets want to unwind the war trade,” adding that U.S. 10-year yields could “quickly” fall to 4%.

At the depth of the rout last month, swaps implied four interest rate hikes from the European Central Bank and Bank of England this year, with the first expected as early as this month. By Wednesday, the expectations had dwindled to just two quarter-point increases from the ECB and one from the BOE later this year.

German 10-year bond yields slumped 15 basis points to 2.94%, while the equivalent UK rate was about 18 basis points lower at 4.72%.

If the ceasefire holds, the next challenge for investors will be to assess the extent of damage to energy infrastructure and the knock-on impact for energy prices in the coming months. Much will now depend on how quickly transit through Hormuz can resume.

“Central banks will be heaving a sigh of relief because where they stand today they are in reasonably good shape, they can have some time to assess data,” said Guy Miller, chief market strategist at Zurich. “But there will be a pass through from oil, and inflation will be higher for longer.”

(With assistance from Ruth Carson, Alice Atkins, Sujata Rao and Miles J. Herszenhorn.)

©2026 Bloomberg L.P. Visit bloomberg.com. Distributed by Tribune Content Agency, LLC.