US-Iran negotiations expected to cause a sharp drop in international oil prices, with domestic bond yields falling across the board

The likelihood of an end to the war between the United States and Iran is coming into sharper focus, international oil prices have plunged, and as a result, on the 7th, domestic Treasury bond yields fell across the board to close lower.

That day, in the Seoul bond market, the 3-year Treasury bond yield fell by 4.9 basis points (bp; 1bp=0.01 percentage points) from the previous trading day, closing at an annualized yield of 3.546%. The 10-year Treasury bond yield dropped by 4.4 basis points, closing at an annualized yield of 3.888%. Medium- and short-term bonds also strengthened at the same time. The 5-year Treasury bond yield fell by 4.9 basis points to an annualized yield of 3.737%, and the 2-year Treasury bond yield declined by 4.6 basis points to an annualized yield of 3.452%. For long-term bonds, the 20-year Treasury bond yield fell by 3.6 basis points to an annualized yield of 3.895%, while the 30-year and 50-year Treasury bond yields each fell by 2.7 basis points, closing at annualized yields of 3.817% and 3.672%, respectively.

The backdrop of broadly lower bond yields was expectations of easing tensions in the Middle East. On the 6th local time, reports said that the United States and Iran were discussing signing a memorandum of understanding to end the war, and U.S. President Donald Trump also said the likelihood of reaching an agreement with Iran is very high. As observations emerged that geopolitical tensions may ease, the previously unsettling crude oil prices fell sharply. Brent crude oil futures closed at $101.27 per barrel, down 7.83% from the previous trading day; U.S. West Texas Intermediate (WTI) crude oil futures also fell by 7.03%, to $95.08 per barrel.

A drop in international oil prices is generally viewed as a factor that eases inflationary pressure. The market expects that once energy prices stabilize, the upward pressure on consumer prices in the future may decrease, which could also reduce the need for further interest-rate hikes by central banks. Based on this, there has been a trend in the market toward buying large quantities of bonds with strong safe-haven characteristics, pushing bond prices up while yields moved in the opposite direction and fell. That day, foreigners net bought 1,322 contracts of 3-year Treasury bond futures and 1,536 contracts of 10-year Treasury bond futures, helping drive yields lower.

The bond market is not influenced solely by domestic factors; it often moves in tandem with external variables such as U.S. Treasury yields, international oil prices, and exchange rates. Zhao Yongjiu, a researcher at Xinrong Securities, explained that, driven by expectations of the war ending, oil prices fell to below $100 and the exchange rate also declined. After the previous day’s drop in U.S. Treasury yields, Asian market yields fell sharply as well that day, showing a global linkage pattern. In the future, this trend is very likely to continue depending on developments in the Middle East, international oil prices, and U.S. interest-rate direction; if uncertainty increases again, bond yields may shift quickly.