U.S., European, and Japanese government bonds all rise across the board, with market speculation that the Iran war may end soon.

With U.S. President Trump hinting that the war with Iran could be over within a few weeks, global government bond markets surged broadly on Wednesday, oil prices fell sharply, and investors quickly re-priced expectations for interest-rate hikes. Concerns about an energy crisis that has been weighing on global markets for a month showed clear signs of easing.

The yield declines in the U.K. government bond market and in government bond markets of the euro area—such as France and Italy—were all more than 10 basis points. Germany’s 10-year benchmark government bond yield fell by 6 basis points to 2.94%, hitting a new low since March 18. At the same time, U.S. 2-year and 10-year Treasury yields fell by as much as 6 basis points to 3.73% and 4.26%, respectively. Japan’s 40-year Treasury yield declined by 12 basis points to 3.795%.

According to a report by Xinhua News Agency, on the evening of March 31 U.S. President Trump said at the White House that the U.S. would end its fighting with Iran within “two to three weeks,” and that an agreement with Iran could be reached before that. Separately, according to a report by CCTV News, Iranian President Pezeshkian said that Iran is willing to end the war, but only if its demands are met—especially by receiving assurances that it will no longer be subject to aggression. Trump’s remarks reignited the market’s optimism about a de-escalation of the situation.

Market bets on interest-rate hikes subsequently retreated quickly. The probability of an April rate hike by the European Central Bank has dropped to below 50%, and the probability of a rate hike by the Bank of England has fallen to about one-third. The U.S. dollar spot index fell by as much as 0.4%, as dollar long positions that had built up sharply due to the Iran war are beginning to loosen.

Interest-rate-hike expectations cool sharply

The expectation of easing in the Iran situation directly hit market judgments about the policy paths of major central banks. For the full year, as of now, the market is pricing cumulative rate hikes for the European Central Bank and the Bank of England at roughly 60 basis points and 43 basis points, respectively—both at the lowest levels since mid-July last month.

After the Iran war broke out, Middle Eastern energy exports were severely disrupted, inflation expectations surged rapidly, and the market at one point strongly priced in the European Central Bank and the Bank of England continuing to raise rates. This reversal of expectations shows that bond investors are repositioning for a possible policy shift.

The U.S. Treasury market also benefited in tandem. Bloomberg’s U.S. government bond total return index fell 1.7% in March, the largest monthly drop since the end of 2024, while the subsequent yield pullback signals a notable shift in market sentiment.

Kenta Inoue, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo, said: “For Trump, in the context of falling approval ratings and steadily rising risks, he cannot afford the cost of a protracted war.” He expects that as worries about the energy crisis fade, “the short end of the yield curve may trend downward to reflect expectations for rate cuts by the Federal Reserve, while the long end is unlikely to rise further.”

Uncertainty remains; markets stay cautious

Since the outbreak of the Iran war, the U.S. dollar has been the biggest beneficiary in the foreign-exchange market, becoming one of the largest long positions accumulated in the market. As expectations for the war’s end have heated up, this trading logic is now facing a test.

Valentin Marinov, head of G-10 FX research and strategy at Crédit Agricole CIB, said: “The dollar stood out during the Iran war and became the largest long position in the FX market, and we are currently seeing some of those longs being closed out and exiting.”

Although market sentiment has clearly improved, analysts point out that many uncertainties still need to be clarified. In a research note, a team of strategists led by Benjamin Schroeder at ING said:

“After reports emerge about information being exchanged among the parties to the conflict, the market will closely watch whether this can open a path toward a downgrade in the situation.”

The team also raised a key question: “Given the damage that the war has already caused, how quickly can energy flows fully recover remains an open question.” This suggests that even if a ceasefire agreement is reached, the process of normalizing the energy market may still take time, and inflation pressures may not necessarily ease quickly.

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