The U.S. forces hit targets in southern Iran early Tuesday, and Iran's Revolutionary Guard said it was ready to strike back. Bond yields fell anyway.
The bond market is betting peace gets done.
The 10-year Treasury yield, which is the rate the U.S. government pays to borrow for 10 years, dropped more than 6 basis points to 4.504%. The 2-year yield, which tracks closer to Federal Reserve interest-rate policy, fell more than 5 basis points to 4.068%, and the 30-year yield slid to 5.027%.
One basis point equals 0.01%, and yields and bond prices move in opposite directions, so falling yields mean investors were buying.
The moves caught U.S. markets up to European bonds, which rallied while America was off for Memorial Day.
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U.S. Central Command called Tuesday's strikes "self defense," while Rubio, traveling in India, said the Strait of Hormuz "will ultimately have to be opened one way or the other."
Iran's Islamic Revolutionary Guard Corps said it identified and engaged U.S. drones and an F-35 jet fighter that entered Iranian airspace, and warned of more retaliation against any ceasefire violations.
Through all of that, Trump posted on Truth Social that a peace agreement could be in sight, with negotiations "proceeding nicely." The bond market clearly leaned on the second message.
Falling yields lower the cost of mortgages, car loans, and corporate debt, so they tend to lift stocks - especially rate-sensitive names like real estate and growth tech.
For investors wondering whether to lean into bonds during this stretch, our piece on Treasuries and TIPS walks through how government debt can play defense in a portfolio.
Friday brings the April personal consumption expenditures price index, the Fed's preferred inflation measure, with economists polled by Dow Jones expecting a 0.5% increase from March and a 3.8% rise year over year.
Consumer confidence already slipped in May, with the Conference Board pointing to inflation from the Middle East conflict.
If PCE comes in hot, the rate-cut story has to take a step back regardless of what happens with Iran.
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